Adviser’s Consultant: Hammering out succession plans that work for everyone

Successors require patience, and founders need to recognize that adviser retention may necessitate sharing ownership.

Charlie Fitzgerald spent the last five years or so figuring out how to equitably pass on his 19-year-old financial advice firm, Moisand, Fitzgerald, Tamayo, to the next generation.

The Orlando-based firm structured agreements three years ago to sell a 5% stake to one young adviser, and in the past year it sold another 5% to a second young adviser.

The firm’s owners envision that in about 10 to 15 years the ownership control of the business will transfer out of the hands of its three namesakes.

“The key thing in inviting someone to become an owner is that they have become not just additive, but essential to the company,” said Mr. Fitzgerald, who is 56.

Difficulty finding the right people to take over for company founders is one of the biggest reasons most advisory firms do not have succession plans in place.

(More: RIAs without a succession plan should take these steps immediately)

In this case, the two newest owners each worked for the firm for about a decade.

However, many times, younger advisers don’t have the patience to wait until the founders are ready to share ownership, and sometimes founders can drag their feet too long. Either of these situations can push a potential successor to jump to another firm in search of better opportunities.

Another giant hurdle of succession planning is figuring out how younger advisers will afford to pay founders for their decades of sweat and tears building the business.

At Moisand, Fitzgerald Tamayo, the firm worked with a small community bank to secure seven-year notes for the new owners and agreements that allowed the collateral backing the loans to be in a brokerage account, so those dollars are invested and not just sitting there, Mr. Fitzgerald said.

The agreements called for the two new owners to make sizable down payments and spelled out that if either failed to make loan payments, the bank would not become an owner of the advisory firm, instead the firm itself would repay the balance, he said.

Succession planning requires firms to think out all possible scenarios that can happen over time and provide a solution for those circumstances in the legal agreements governing the operating and ownership agreements for the business.

Finally, assuming a firm has more than one founder, an agreement to share equity in the firm requires all the owners agree on who the successors will be, the structure of the changeover, and when they’ll be expected to give up their decision-making rights.

That can take time to work through, Mr. Fitzgerald said.

(More: Adviser’s Consultant: Incorporating clients’ risk scores into all planning decisions)

“Getting these deals done takes a partner, and a lawyer, dedicated to making them happen,” he said.

Beyond the challenges, though, crafting a well-designed succession plan is a positive for founders seeking a payout, as well as for clients to gain clarity on who will be looking out for their financial concerns down the road.

“It’s a big plus in clients’ eyes to know that financial planners are actually planning and thinking about the future,” Mr. Fitzgerald said. “Clients want to know that we are thinking ahead for them.”

Tipsheet:

• The more time — in terms of years — that firms plan for succession the more likely founders will receive the financial rewards of their efforts and feel satisfied the business is in capable hands.

• Consider ownership for those employees who have moved beyond just adding value to the company, particularly those who the business depends on to run well. Awarding ownership opportunities helps firms retain crucial people.

• Sharing ownership also can be a signal to others at the firm that the founders are serious about finding successors who are patient and dedicated.

• Look for a bank to finance loans that will be most flexible about the terms and really interested in helping the firm work out its unique issues.

• Get a formal valuation to estimate the value of a firm, even if the owners decide to apply a generous discount in offering ownership to internal successors.