Succession planning still an advisory hurdle

Having a strategy in place will ease switch, raise sale price

Jun 17, 2012 @ 12:01 am


Allan Eyre never made a succession plan.

His solo advisory practice consisted of a close-knit group of 40 or so clients whom he intended to serve as long as he could. Then the longtime widower fell in love and remarried — and everything changed.

“I should have started planning three or four years ahead, but now I wanted out — to do other things,” Mr. Eyre said.

He evaluated potential buyers quickly and sold his practice to Advisors Capital Management LLC in Hasbrouck Heights, N.J., last July, with an agreement that he would help with the transition through the end of this year.

“I would have liked to have more time to review potential buyers and build my practice larger,” Mr. Eyre said.

That would have resulted in a better selling price and a more relaxed transition for his clients, he said.

Custodians and broker-dealers have programs that offer help in developing and executing succession plans, but despite their efforts, the majority of financial advisers still don't have a formal plan.

Advisers have an emotional aversion to thinking about leaving their business, and many, as Mr. Eyre did, sidestep the question with the idea of working until the end.

To address the issue head-on, Fidelity Institutional Wealth Services created a workshop program to help advisers get past those emotional hurdles.

One exercise has advisers write about their vision of their future. Another is a card game that has them sort through personal statements to find the most compatible succession strategy.


Fidelity has conducted a few workshops and plans more in different parts of the country.

“We built this program around the insight that succession planning conversations need to start at a higher level. Many advisers rush to determine their firm's value or find a partner, but succession planning is more about shifting one's mindset than making a transaction,” said David E. Canter, executive vice president and head of practice management and consulting at FIWS.

“It got people focused not on cash flow analysis or revenue multiples but on taking a step back to look at simple things like, "What are my goals?'” said Kevin T. Grimes, portfolio manager at Grimes & Co. Inc., a family-run business with an internal succession strategy, who attended a FIWS workshop.

“It sounds simple, but advisers don't do that,” he said. “I don't think anyone really does in any industry.”

Something is definitely holding advisers back from finishing and executing a plan.

In a survey of 400 advisory firms by InvestmentNews' IN Adviser Solutions Team this year, just 7% of the respondents said that they have executed a formal succession plan, and another 15% said that they have a plan that is ready to go.

At the other end of the readiness curve, 6% said that they aren't planning at all and 44% have gotten only as far as planning to develop a plan.

Meanwhile, more than half of advisers are over 50.

“I think there are emotional issues that are getting in the way for some advisers. It is difficult for some to think about giving up control,” said Kelli Cruz, director of the IN Adviser Solutions Team.

“Advisers who are able to execute a plan are those who manage their business like a business. Their own identity isn't wrapped up in the name of the firm,” Ms. Cruz said.

Here are some approaches used by broker-dealers and custodians to help advisers to get past the minefields of succession planning.


About 60% of registered investment advisers affiliated with The Charles Schwab Corp. have a clear succession plan, which puts its advisers way ahead of the pack. The figures come from Schwab's 2011 RIA Benchmarking Study, which comprises self-reported information from its advisers.

That study is one component of the firm's success in getting its advisers to plan. It gives them a sense of where they stand compared to their peers, and may offer an incentive to outperform.

“We have learned that benchmarking leads to better performance,” said Scott Slater, senior business management consultant for business consulting at Schwab Advisor Services.

Advisers check it and ask, “"Is my firm performing at a good, solid place?'” he said.

“It does take some soul-searching, though,” to begin planning, Mr. Slater said.

Last year, Schwab Advisor Services began offering financing help for internal transitions, a service also provided by several other broker-dealers and custodians.

The financing helped some firms execute an internal succession plan, but generally, those were larger firms with an average of three senior partners, Mr. Slater said.


Independent broker-dealer LPL Financial LLC has focused on succession planning for more than a decade, but only a minority of its advisers have a formalized plan, said Sal Zambito, the firm's senior vice president of business consulting.

“For many of these advisers, their business is more than just a source of income. It is their life, livelihood, a part of the community,” he said. “It is emotional because they are so tied to the business.”

LPL offers matchmaking and financing help, but the first step is developing a healthy business that will have value when advisers are ready to retire, Mr. Zambito said.

Another precursor is planning for emergencies, and LPL begins the push toward succession planning by leading advisers through the less difficult process of setting up a contingency plan with another adviser.

“We give them the documents for it and encourage them to put one in place,” Mr. Zambito said.


For advisers who have built their businesses from nothing, the thought of succession planning can cause paralysis, said Kirk Hulett, executive vice president of strategy and practice management at Securities America Inc., the independent broker-dealer unit of Securities America Financial Corp., a subsidiary of Ladenburg Thalmann Financial Services Inc.

“It makes owners face their own mortality,” he said. “But successions happen whether they are planned or unplanned, “ Mr. Hulett said.

Like LPL, Securities America starts by making sure that all its affiliated advisers have a continuity partner who will fill in for them in an emergency. To add urgency to the matter, the firm has a default continuity agreement that it will put in place if advisers don't turn in one of their own.

“It sets a low valuation so that advisers have an incentive to get a better one,” Mr. Hulett said.

According to a group of advisers interviewed at Securities America's national conference June 9-11 in Denver, what helped them get over the hurdle was a Securities America program called Next Level, which offers group and individual coaching on everything from business development to succession planning. One technique is to ask advisers to write down how they envision their lives during retirement.


George Tamer, director of strategic relationships at TD Ameritrade Institutional, oversees a team that works with independent advisers on succession planning. He has seen firsthand how failure to plan can hurt advisers and their families when an unexpected illness strikes.

“We use those examples to educate other firms and tell them they need to start thinking about it,” said Mr. Tamer, who added that he has many cautionary tales to share with advisers.

Team members liken themselves to real estate agents who have to talk a homeowner out of making a decision about selling a home emotionally.

The group is looking into developing new ways to help advisers get through their internal conflicts, Mr. Tamer said.

“You get emotionally attached and it can cause you to make bad decisions,” he said. “We try to be a sounding board [and] be sure they do take a step back and remove emotions.”


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