Beacon Pointe Advisors LLC of Newport Beach, Calif., has the same challenges that many up-and-coming registered investment advisory firms face: how to plan for succession among multiple partners of an employee-owned firm.
Since Beacon was formed in 2002, the firm's seven partners have come together to create a practice that oversees $4.5 billion in assets, focusing on finding boutique money managers for both institutional and private clients.
The firm has a thriving business serving foundations and endowments, and it serves individual clients who get access to its stable of money managers, in addition to financial planning services.
Most of the firm's partners have a way to go before they begin considering retirement, according to managing director Matt Cooper, who at 47 is the second-oldest partner in the firm.
Their planning is complicated by the possibility that more partners could come on board as the firm grows. No one partner has a majority stake.
“We've clearly articulated succession planning in operating documents,” and at partner meetings, the principals routinely talk about how a retirement could be handled, Mr. Cooper said.
The formal plan sets up a valuation process that uses both revenue and earnings, averaged over two years, to come up with a value for a partner's interest. That share would be bought out over a period of five years.
“When one of us retires, it happens,” Mr. Cooper said of the buyout plan.
Beacon's succession agreement covers a wide variety of contingencies.
In case of death, the firm has insurance to cover the purchase of a partner's interest.
“If someone commits a felony, all bets are off,” Mr. Cooper said.
The offending partner would get a reduced buyout and receive it over a shorter period of time, he said.
Handling succession internally has advantages, Mr. Cooper said.
“If you sell internally, you're most likely to see [a partner] hang around and keep the clients,” he said.
“If you sell to a third party, that's less certain,” Mr. Cooper added, noting that lost clients will result in a lower payout to a retiring partner.
Handing off clients internally should ensure continuity of service, he said.
Indeed, internal plans are by far the most successful and appeal to owners who are concerned about the sustainability and legacy of their businesses, according to the 2012 Succession Planning Study conducted by IN Adviser Solutions, a division of InvestmentNews.
Mr. Cooper feels comfortable that a firm the size of Beacon can finance the purchase of a retiring partner's interest, but for other firms, funding a buyout is a challenge.
He said: “The issue always is, do [firms] have the capital and is the cash flow available in the business” to buy out a partner?”
“So internal succession plans come down to questions of: Can younger generations find the capital [and] is the retiring partner willing to accept the terms?”
The IN Advisor Solutions study found that advisers worry that internal financing arrangements may not be sufficient and that industry participants see limited outside funding options.
To help firms figure out the complexities of succession financing, Beacon is one of six prominent RIA firms that formed The Alliance for RIAs, dubbed aRIA, to develop and share growth strategies for advisers, with the goal of maximizing the value of their businesses for retiring partners.
“It's really an effort to produce [ideas that] can be tested in the trenches,” Mr. Cooper said.
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