Succession Planning

Developing a workable succession plan: What do advisers really want?

Selling a practice through a change-of-control liquidity event is not a real succession plan and not what advisers should want

May 11, 2014 @ 12:01 am

By David Grau Sr.

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The enormous focus in recent years on empowering succession planning on the part of broker-dealers and custodians is truly laudable and reflects the inescapable changes that the aging of the overall financial adviser population will bring to the independent-advisory business in the near future.

Unfortunately, while broker-dealers and custodians understand the importance of developing solutions to this challenge, they are, in many instances, still not listening to precisely what the typical independent adviser wants by way of succession planning.

This is evidenced by the fact that the vast majority of new succession planning support programs being launched by broker-dealers and custodians revolve around extending financing to advisers to acquire other practices, or to facilitate the adviser's acquisition by another firm.

So what's the problem with this approach? That's simple. To the overwhelming majority of independent financial advisers, selling the practice through a change-of-control liquidity event — however the buyer finances it — is not a succession plan. It's an exit strategy. And it's overwhelmingly what independent advisers do not want when they think about their own future and the future of their business.


The core question that broker-dealers and custodians should ask themselves when thinking about how to best empower succession planning strategies for advisers is, "What does the typical adviser envision as a preferred succession plan?" The answer is simple and goes to the very heart of advisers' reasons for going independent in the first place: To maximize control over their own professional destinies.

Viewed within this important context, independent broker-dealers and custodians can most effectively help advisers achieve the control they desire at the close of their professional careers by enabling them to gradually exit their businesses at their own pace, while also ensuring that their practices and clients will be in good hands after they depart.

There's more to it than that, of course, but we need to start with the fundamental recognition that control is critical for independent advisers: control over the time period over which they exit the business, over the pace at which they downsize their work load, over who assumes the equity they have built in the business, and over the extent to which these successors share the original founding culture and vision of the practice.

The ideal succession plan for many advisers is one that maximizes their control of the process and the ability to realize value from the practice, cultivates the next generation of adviser talent while creating ownership and opportunity for them, and strengthens the business for the long term.

Crafting a succession strategy that achieves all these objectives is not easy, but it is possible. One of the most efficient and lucrative approaches is to help the next generation build on the success and value created by the previous generation — to turn producers or advisers into investors in a founding owner's legacy by establishing a lifestyle succession plan.

Such a plan is based on the founder's goals and needs, and establishes a gradual transition from one generation to the next by supporting and rewarding the evolution of business skill sets at the founder level from entrepreneur, to shareholder, to CEO, to mentor. When designed and executed correctly, the plan creates an alignment of interests in which the best course of action for the founder, the business and the client base are all the same thing.

The primary thrust behind the lifestyle succession plan is the utilization of all the compensation elements of a business to ensure a smooth transition: wages or paychecks for work performed, profit distributions as a return on investment and the simultaneous, gradual realization of equity value as it grows.

Adding a continuing equity component to a firm's compensation structure allows the business to create a shared risk/reward relationship between employers and employees — a connection between the generations that provides both the means and the rewards of ownership for generations of advisers and their clients.

This shared sense of ownership and the gradual transfer of equity are the crucial links that will motivate the next generation of advisers to continue to execute on the founder's vision for the business, giving the founder the desired control and continued involvement, while maximizing the value of the practice and ensuring that clients are looked after.

In many cases, the first step in the plan is a sale of a minority stock or ownership interest to one or more next-generation advisers. The purchase is usually at a small discount, paid for on a long-term note, and supplemented with a small, staged grant of stock to reward and encourage longevity of employment.


Most lifestyle succession plans are built around this strategy, employing more than one tranche and with each tranche taking about five to seven years to complete. This step-by-step approach allows the founder to move gradually but definitively and to alter course if necessary. Of course, the details of each plan are much more involved than a simple overview can explain, and they vary significantly from practice to practice. There is no such thing as a "succession plan in a box."

Knowing what to avoid in executing a succession plan can be just as important as knowing what to do. In our experience, many missteps occur when the transfer of equity between the founding adviser and his or her successors is handled inefficiently or without consideration for the tax consequences.

For example, founding advisers should avoid granting ownership through gifts of stock. While granting may seem simple, quick and paperless, there are in fact significant tax implications that can create unexpected burdens for both the founding adviser and potential successors.


So-called phantom-stock plans, which award cash to employees based on an assumed number of shares in the company — but not on actual stock ownership — also have no useful function in succession planning. In practice, these plans are not equity transfers at all but a form of deferred cash compensation.

Independent financial advisers want the same thing at the end of their careers that they want at the beginning: control over their own destinies. In order to help advisers exit their businesses with the control and assurance they desire — for themselves, for their clients and for the next generation of advisers — independent broker-dealers and custodians should look beyond financing considerations and exit strategies to a careful, sophisticated and gradual approach to succession planning.

After all, as the architects of some of the most valuable professional service models in America, successful independent advisers deserve the opportunity to control their own destiny and retire on their own terms.

David Grau Sr. is president of FP Transitions, which he co-founded. His first book, "Succession Planning for Financial Advisors: Building an Enduring Business," will be published in June.


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