Succession Planning Problem: Who Takes Over? | Lord Abbett

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Practice Management

Selling a service business is essentially selling relationships, something that is difficult to quantify even in an industry as metrics-driven as wealth management.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

I have found that when financial advisors retire, they usually want to make sure they take care of their clients, as well as get paid for their practice, which they spent decades building and nurturing. However, doing both of these things can be a tricky proposition, and will likely play out to be the biggest challenge facing the industry over the next 10 years.

The source of the urgency is that the average age of the wirehouse financial advisor is 50-plus. With few advisors being trained, the average is only increasing. The source of the inherent problem is that selling a service business is essentially selling relationships, something that is difficult to quantify even in an industry as metrics-driven as wealth management.

So while websites purport to make a match between a buyer and seller of a practice, the fact is that the clients within those practices have their own say about whom they wish to manage their money. If I want to sell my car, the car has no say about who the new owner will be. Clients have their own minds, their own ideas, and do not care that their relationship has been “sold” from one advisor to another.  In fact, the idea that any individual advisor, or advisory firm, can “own” someone else’s money is absurd. What top advisors do have is a loyal group of clients who respect the services that their advisor provides.

Rough Transition
However, the nature and intimacy of the relationship between an advisor and his or her client, which creates that wonderful bond and loyalty, is exactly what makes the transition to a new advisor so difficult. The irony, then, is that the best-run practices, with both client and advisor happy with the relationship, multiplied over many clients, is exactly what makes the succession plan so difficult to execute. Making it even more difficult is that these advisors, in my experience, are the same ones who absolutely love what they do every day and are most reluctant to give it up even when it is the best thing for their clients, themselves and their firms.

One wirehouse manager, whose office has a very large number of advisors over 60, told me: “The top advisors procrastinate in the search for a successor. Then when they finally do want to do something, it is because of an issue, like their health or money or family issues. Their transition is then rushed because of the panic created by their issue as opposed to making the best business decision for themselves and their clients.”

Firms are actively addressing the problem, attempting to be proactive. But they are stymied by stubborn, older advisors who do not want to give up control. Another manager told me: “Advisors too often wait until their business is no longer sellable. Their clients age, and they have had little success in getting to know the younger generation who are inheriting the assets. The buyer then realizes that the practice that they thought they want to buy is literally dying away.”

One of the largest disconnects I see as a headhunter is that advisors who are close to retirement and looking to sell their practice to a successor compare that negotiation with the most recent recruiting deal that they have heard about, either directly or through the trade press. Of course, the difference is that when the advisor is being recruited, he or she is staying involved in the practice. Like any small business, the advisory practice is worth much more money to a buyer when the principal is still running things. The practice that has a loyal group of clients run by a passionate, skilled advisor is, of course, worth more than that same group of clients who have only a tenuous connection to some new successor.

I consulted with a number of advisors who either have found or thought they had found successors as well as branch managers who have attempted to counsel their advisors on a solution. Two overriding themes emerged: First, finding the perfect single successor who runs a practice the same way as you do is an exercise in futility. As one of them, Andy (whose last name was omitted so he could speak candidly), puts it, “Betting on one person to be a clone of you is impossible.” The second theme is that too often the best dollar offer will come from a source that is not the best solution for the clients of the practice, which puts the retiring advisor in a difficult ethical position.

Andy, a $2 million producer now in his fifties, had the foresight to recognize 10 years ago that he wanted a partner who would take some of the workload of his practice off his plate while also being trained to take over the practice down the road. Now on his third attempt at a “clone,” he realizes that he will never find the perfect person, and is endeavoring to train the support staff and the advisors on his team to collectively do even more efficiently what he does by himself. His goal, however, was always about reducing his own workload and doing better by his clients rather than maximizing his financial gain with a sale.

John (whose last name also was omitted) is an aged 60-plus producer, who does $1.5 million, also has been looking for a long time. Unlike Andy, he was looking to leave the business, though he loved it, to spend more time with family. He told me: “Finding the perfect person is, of course, difficult, if not impossible. But even if you do find the perfect person who is capable of taking care of your clients, it is impossible to duplicate the depth of personal relationships that can only come in time. Clients trust who they know, and they don’t know somebody new.”

How do you fix that? “The best way would be to have the successor work with me for years before I was ready to walk away. I was not that smart. I found the right guy, but he will have to work to keep the relationships intact.”  What about the money? “Since it took me longer to find the right person, I worked longer and became less concerned about getting as much. I’ll still be paid nicely, but I know that I have taken care of my clients. I hope that they will give [the successor] a chance.”

Finding a New “Alpha Dog”
Jim Gold, president of Steward Partners, warns that your clients are aware of your age and are wondering about your successor: “If you don’t plan on something, they will make plans without you.” He advises managers to bring up succession planning as part of the normal business planning process that advisors typically do annually with their managers. He warns, however: “The Alpha Dog advisor is usually irreplaceable. The practice is just not worth as much without him or her.”

In addition, Gold warns that the firm’s agenda is often not the same as either the buyer’s or the seller’s: “The firm wants the clients attached to the firm and not a specific advisor.” The contracts that the big firms broker between a retiring advisor and his successor have non-compete language that makes it clear that the successor will not be able to move with those assets, even though he or she paid for them. The solution is to sign that document only after the team has been intact as a partnership for three or more years to get protection under the broker protocol.

A branch manager told me of a failed partnership in his office between an older advisor who took on a junior partner who also would be his successor. While the financial terms were agreeable, the team never took the time to truly integrate each other into each other’s businesses. The younger advisor, while well-intentioned, had zero contact with the younger generation of the older advisor’s book. After a few years, the partnership needed to be unwound.

The bitter conundrum is that the best practices are run by advisors who are the most difficult to replace or replicate. Advisors and their managers need to think as Stephen Covey preached: Begin with the end in mind. Starting a search for a partner/successor early will allow for mistakes, and time in the partnership will give the younger advisor the protection of the protocol.

Finally, advisors need to recognize that their absence changes the value of their old business. They should, therefore, set their price based upon the success of the transition over time, rather than a price based upon the most recent trailing 12 months. Staying involved in a diminished role ensures the continuity clients expect, enables transition to the next generation, and ensures the retiring advisor will get a wonderful long-term annuity payment that will be a just reward for a lifelong passion and avocation.

—by Danny Sarch

Danny Sarch is president of Leitner Sarch Consultants in White Plains, NewYork.


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