Means of transition

Approaches for ensuring firm continuity and client well-being after an owner departs

Jul 14, 2013 @ 12:01 am

By Liz Skinner

Financial advisers invest blood, sweat and tears in the firms they create — and they want those firms to survive beyond their own working days. But many haven't figured out the best way to exit.

In fact, only half of the industry has even begun to develop a succession strategy, even though 92% believe it's at least moderately risky not to have a plan, according to an InvestmentNews survey conducted last year of about 400 advisers.

In this story, we look at three advisers and their different succession strategies.

While most advisers identify internal succession as the ideal strategy, only 36% of firms have a process in place to find and prepare a successor, according to the survey. Victoria Fillet, founder of Blueprint Financial Planning LLC and Value Architects Asset Management LLC, shares her plan for bringing the next generation into her firm.

No matter how a departure is plotted, advisers often face surprises that require creativity. Kathleen Rehl, founder of Rehl Financial Advisors, has taken this to heart — she's walking away from the financial advice business in a unique way that assures she and her clients will be well taken care of.

Many advisers seek external buyers but don't even begin to dig into the process until they're ready to retire. Investors Asset Management Inc.'s founder, Richard Erwin, shares how starting early helped him stay on board through the transition and beyond.

Bringing in new blood

Ms. Fillet, 66, is aiming to retire in five to 10 years after she finishes grooming her internal successors and they're ready to take over daily operations.

She noted that there are significant difficulties in trying to sell an advisory firm outright. First, owners often overvalue what their client base is worth. Additionally, firms often have a client base that ages along with the adviser, and the buyer is left with customers who are all drawing down their assets.

Instead, Ms. Fillet and business partner Richard Konrad, who is 60, plan to transition their clients slowly to two young planning professionals. They already have selected a financial planner but are still searching for the right candidate to fill an investment management role.

“We want to transition the business as opposed to waking up one morning and [having] someone else own it,” Ms. Fillet said.

Internal succession plans can be a challenge because it's nearly impossible to find a young planner with the capital to buy an already thriving business. Under Ms. Fillet's approach, these younger advisers will help build the firm, providing what she calls “sweat equity” for five to 10 years. They will receive equity stakes in the company in lieu of bonuses.

During these years, Ms. Fillet and her partner will help the younger advisers gain the expertise clients demand, while the younger planners will offer “vitality that will bring in a new string of clients, which will keep the business vibrant and growing,” she said.

As the older partners ease their way out of the business, clients brought in by the younger advisers increasingly will become the customer base. Ms. Fillet and Mr. Konrad will receive a descending trail of profits once they retire.

Ms. Fillet has been picky about the young advisers she has brought into the business, because of the size of the firm's team. Blueprint Financial and Value Architects, which combined manage about $140 million in client assets, have six employees.

“Finding the right personalities that work together is key,” Ms. Fillet said.

It's also essential to make sure clients feel confident that they will receive the same level of service once the next generation of advisers is in charge.

“You have to have clients comfortable with the new people so they feel the firm is just as good as before, maybe even better,” Ms. Fillet said.

Playing matchmaker

Ms. Rehl is walking away from the financial advice business at the end of 2013 to pursue a public-speaking career. She's not selling her 17-year-old business, and she doesn't have an internal successor. But she's crafted a unique approach that will provide her with revenue and her clients with a new adviser.

Ms. Rehl, 66, devised her succession plan over the past three years and began telling clients about her pending exit in January. She's recommending that her clients, most of whom are widows, move their accounts to one of three female advisers Ms. Rehl has chosen.

She will receive 50% of the fees that her clients pay to the new advisers over the first two years. Ms. Rehl also promises that a Rehl Financial Advisors paralegal will help with a smooth transition to any of the three advisers.

“I had actually begun introducing clients to the principals I'm recommending they go with two years ago, when they came to a party to celebrate the firm's 15-year anniversary,” Ms. Rehl said.

When she began to contemplate how to retire from the industry, she wanted a solution that took care of all her clients.

Clients will be steered to one or another of the women she chose, based on whether they want limited financial services or full advice. One of the women is in a different area of the country, a city where Ms. Rehl originally began building a practice and still has a group of loyal clients.

Having diverse service models made appraising the practice a challenge, she said. Valuing a practice per each transitioning client is a fairly novel idea, but it can be quite attractive to buyers who won't risk paying a premium to inherit clients who could take their assets to another adviser.

With her clients' needs met, Ms. Rehl plans to ramp up her speaking engagements to public audiences and to advisers on how to work with widows, providing a first-hand glimpse into the dark path these women walk after the death of their spouse.

Ms. Rehl's husband and business partner died in 2007, a life-changing event for her that led her to focus on advising widows.

“After I became a widow and experienced that crushing grief, I really got it,” Ms. Rehl said.

Sticking around awhile

Shortly after turning 60, Mr. Erwin decided he needed to get serious about creating a succession plan for his firm. He had spent nine years trying to cultivate an internal candidate to take over, but he could not find someone who could generate new business, manage the firm and put up enough capital to buy the business.

Mr. Erwin worried that if he died, his 30-year-old firm, which manages nearly $200 million in assets and which he co-owns with his wife (who is not involved in running the business), would have to be sold at a fire sale price.

He reached out to his custodians, Schwab Advisor Services and Fidelity Institutional Wealth Services, for help finding other advisers interested in buying a firm. After visiting with owners of eight to 10 firms, Mr. Erwin sealed a deal with Exencial Wealth Advisors in January.

“I wanted someone who had respect for what we did with individual security analysis and a desire to sustain that, because that's why many of our clients came to us,” said Mr. Erwin, now 63.

He had more than a dozen additional criteria he considered when examining prospective buyers. One of them was that he wanted to continue working for a while.

Mr. Erwin negotiated an agreement with Exencial where he will work for them for three years as a well-paid senior security analyst/ portfolio manager and then receive a payout over a certain number of years. The terms of the deal are standard for the financial industry, he said, though he declined to provide more-specific details.

“I wasn't ready to retire yet, but I wanted to have a plan in place,” Mr. Erwin said. “Exencial gave me the opportunity to have a valuable role and good compensation until I reached age 66.”

About six months into his new role at Exencial, Mr. Erwin said he's happy not to have to generate new business, pay the bills, manage employees and everything else that comes with being the boss of a small advisory firm. But given that he founded his firm in 1983 — the first registered investment adviser in Plano, Texas — Mr. Erwin said both he and his employees have had an adjustment period.

“It's hard when you've built something for 30 years to just then let go of it,” he said. “I've gone from the role of being the owner of the firm to being an employee.”


What do you think?

View comments

Recommended next

Upcoming event

Nov 20


Future of Financial Advice

An innovative conference dedicated to improving the client experience by enhancing digital technology, mainstreaming healthcare and optimizing wealth management strategies.The Future of Financial Advice will provide a forum for... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print