The costly mistake 80% of advisers make

Succession planning is like exercising: You know it's good for you, but it's easy to put off until tomorrow

Nov 2, 2015 @ 12:41 pm

By Steve Sanduski

Succession planning is a critical yet woefully neglected business necessity that could cost advisers millions of dollars if not properly handled.

Depending on what survey you read, as few as 1 out of 5 financial advisers have a binding and credible succession plan in place. The lack of one could cost you and your heirs millions of lost dollars and is a disservice (and some would say a fiduciary breach) to your clients.

Ask yourself, if you die tomorrow, will you feel good about how well your clients will be taken care of and how well your heirs will be compensated?

The question requires making an important distinction between succession planning and continuity planning. Succession planning is a well-thought out, intentional plan to transition management and ownership of your firm to someone else. Continuity planning is having a plan in place to deal with a sudden disaster that threatens the immediate functioning of your business — like you getting hit by the proverbial bus.

The two types of plans go hand in hand and you need both.

To learn more about how to effectively implement a succession plan, I recently completed a podcast interview with Tim Kochis, the former CEO of Aspiriant, and one with Jay Hummel, a corporate strategy executive at Envestnet. Mr. Kochis and Mr. Hummel, along with Eric Hehman, co-authored a new book on succession planning titled, Success and Succession.

Mr. Kochis co-founded Kochis Fitz, a multi-billion dollar RIA firm known today as Aspiriant, and effectively transitioned himself out of the firm after a legendary four-decade career. Mr. Hummel is the former president of an RIA and now leads the corporate strategy group at Envestnet.

(More succession insights: Why not having a continuity plan for your practice is reckless)


Here are seven insights from those conversations that can help financial advisers effectively implement a succession plan.

1. Like goals, you have to put your succession plan in writing.

“You don't really have a succession plan unless you've written it down and you've made it public,” said Mr. Kochis. Putting it on paper makes it more likely you will measure performance against it and, “makes it more likely you will give other people a stake in making it happen.”

According to the book's authors, your written succession plan should take into consideration the following four things:

One, have a clear understanding of what are you trying to achieve, what your firm values, and what you stand for.

Two, how you will create a firm without “founder dependency.”

Three, the form of governance and control, which is consistent with how the firm must operate to best serve clients.

Four, how you will transition the equity of the firm to properly reward the founder while still leaving enough future upside for the successor.

2. Emotions are often the biggest hurdle to overcome in starting a succession plan — but there are strategies to deal with them.

Stepping away from a business you founded can be tough. However, developing a succession plan actually puts you in control of how it happens and allows you to, “do yourself, your staff and, most importantly, your clients a big favor by putting a plan in place to ensure the continuity of the firm,” said Mr. Kochis.

In addition, an effective plan is part of your professional responsibility. Pershing's Mark Tibergien, who was interviewed for the book, said, “Failing to plan for continuity is an egregious violation of an adviser's fiduciary duty.”

3. Founders and successors have very different views on “risk” and they'd each be wise to understand the other's point of view.

Founders feel like they took a huge risk to start their business. They may not have made any money for a while, may have lived off a spouse's income, and put in long hours for little pay. But, as Mr. Hummel pointed out, they usually didn't have a big cash outlay to start the firm and they called all the shots.

By contrast, successors who are buying into a thriving firm have to pay a substantial amount of money for what is frequently a minority interest in an illiquid asset. Often, they have to take out a second mortgage, make debt payments, and still be subject to the governance structure of a firm that may be founder-centric.


This difference in the view of risk between founders and successors “is a major issue,” said Mr. Hummel. One solution is to step into the shoes of the other person. How would you feel? Can you see that person's point of view? Can you find the merit in their side of the equation? A little empathy goes a long way here.

4. Determine which of the three main types of succession strategies makes the most sense for your business.

You can sell your business, merge it with another, or develop an internal succession plan. If you have no plan for any of those, then by default you are heading toward running it into the ground while you die with your boots on.

Psychologically, you may prefer to develop an internal succession plan, but Mr. Kochis said an outright sale seems to be the most common. No matter which route you choose, start today to make your business more attractive by systematizing business development and client service and make the firm less reliant on you.

As United Capital CEO Joe Duran told me on an earlier podcast, “The more important you are to the business, the less valuable the business is.”

5. Start today to pull the levers that will raise the valuation of your firm.

Several factors affect the value of your firm. Key among them are: the durability and growth rate of your client base, cash flow and profitability, and the status of key risks including the level of dependency on the founder, the quality of the management team, and the consistency and scalability of the client service and investment management models.

In other words, all the factors that would make a non-financial advisory business highly valuable apply here too. The most valuable advisory businesses are run as businesses, not personal cash flow machines. One key step you can take today is to implement a rigorous strategic planning process and address the issues holding back your valuation.


6. The successor who takes over from a founder will likely have a very different skill set than the founder.

Founders are entrepreneurs. They figure out what has to be done to get a business off the ground and they do it. They're business starters. They make it rain. But once the business is running, they're often times not the best person to manage it.

By contrast, successors are stepping into an existing business and they often have a “management” skill set. They know how to run the business but they're not necessarily big rain makers.

Mr. Hummel said one frustration of many founders is they want a successor who can manage the business AND bring in new clients. That's wishful thinking. Instead, Mr. Hummel said, “If I was running a firm as a founder today, I would understand that my succession has to be a team, it's not just going to be one person.

For larger firms, this team includes separate people to manage the firm, develop new business and deliver planning services to clients.

7. Never forget “the prime motivator” when transitioning ownership and management of your firm.

Mr. Kochis said if your goal is to maximize your personal wealth in a transaction, then “dial the business up and sell it to some relatively nave cash buyer.” He's not a fan of that idea.

Instead, he said the prime motivator should be “what's best for the clients.” While that objective might make the resulting strategy “more complex,” he said, “If you do the right thing for the client, chances are very good that you're going to end up doing the right thing for yourself as well.”

Succession planning is like exercising. You know it's good for you, but it's easy to put off until tomorrow. Unfortunately, sometimes we don't get tomorrow. Sometimes life throws us a curveball when we were expecting a fastball. That's why it's critical to establish continuity and succession plans for your business — today.

Don't establish these plans for you. Do it for the people who rely on you.

Steve Sanduski is president of Belay Advisor. Follow him on Twitter @SteveSanduski.


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