John Enright, a principal at Custom Wealth Management in Syracuse, NY, discusses the challenges of developing a succession plan, including how to determine compensation, whether to bring in a third party and, most importantly, figuring out what's best for his clients.
Has your firm developed and implemented a succession plan?
We have nothing in writing which is painful to admit. We actually had a meeting yesterday morning to talk about what it should look like and who should be included. We discuss it weekly or every two weeks and it keeps moving along but it's not anywhere where it's ready to be implemented.
What are you finding is the biggest challenge in trying to develop a succession plan for your firm?
One of the challenges is trying to understand what types of programs actually work. One of the firms that I was really close to had three senior guys and they had a place for seven or eight years and they just disbanded. They had come up with a compensation plan where all the money goes into the pot to pay expenses. It's sort of like introducing socialism to the most anti-socialist people that exist. You can have one person that thinks he's doing more than the other. In the end it completely fell apart and they disbanded. It was a complete mess in the end because they just didn't do the partnership right.
What is most important consideration for you in terms of developing a succession plan?
There is no value if there are no clients. So the continuation for clients and making sure the transition can be very smooth for them and for the next team members is most important. We are all familiar with each other's clients. The firm name I'm less concerned with than that the process and work continued to be the same for our clients. If we can work that out then I would certainly be happy with that. Our clients are ultimately what makes us who we are as a firm.
Have you talked to other firms that have developed a succession plan and gotten advice on what to do?
Well, I've worked in the past with Mark Tibergien (chief executive officer of Pershing Advisor Solutions) and also Lauren Farasati from The Gifted Practice. I engaged with them for two things: better management ability around team identity and to determine a succession plan. So basically it's determining the practice value and determining how to build succession plan around that. We have to come to terms with how compensation is handed out and what happens to our clients. It's much more difficult than I thought 10 years ago. It's that white elephant.
It's a challenge mostly because of the disparity in the ages and production of the team members. I'm 39 and my biggest concern is the replacement of value for my family. Another team member is 60 and he doesn't care as much about getting value for his family as much as for himself when he shuts down and walks away. But I don't want to be like the partners from that firm I mentioned where they're not on very good terms and there has been a lot of fallout, a lot of bitterness and frustration and lost revenue. I can say that we have done a pretty good job about how to divide the clients and tracking who initiated the clients and then retained clients.
Would you consider selling to a third party?
I hope not. I'd like to think not. Even today if a third party walked in and the agreement was proper and it would be a benefit to my clients we might consider merging with a group; but selling to a third party and then closing the door is not on the agenda and not something we're willing to do.
Is there anything about succession planning that you think a lot of firms forget to consider?
It's unfortunate that fewer firms are creating unique processes that can add value to their firm. Transferability is more than revenue. If you build technology processes so they're transferable it significantly increases the value of your practice. Anything you can transfer beyond clients and revenue can add value. But it's important to keep in mind the stickiness of the process so that it can be easily transferable. I have invested in process management and have a website related to licensing and coaching that is accessible to all team members and is easily transferable. It's all defined; you don't have to come in and relearn or recreate the wheel.
You can go from one Starbucks to the next and the experience will generally be the same. The same is true for the processes and technology you develop for your firm; you have to be able to transfer it from one adviser to the next adviser to the next adviser. If we don't have that and it's completely unique for each adviser then the client is lost and it's like going from a Starbucks to a Dunkin' Donuts. The process is completely different.