Succession and simplicity

After completing some 20 mergers and acquisitions in the past four years, mostly for succession planning purposes, I have one big takeaway: Less complex firms typically have more options and command higher prices.

Not only is simplicity an asset when it comes to succession, it’s also helpful for your staff and even your clients. In fact, I believe in it so strongly that it’s one of our firm’s core values.

Several years back, I was asked by Barron’s to speak on a panel alongside another financial adviser. The topic was about how to better serve clients, and so I discussed how everything we do is repeatable, measurable and scalable. Simply, if there’s an investment or a service that we’d like to offer one client, we make sure we can offer it to all our clients.

Further, just because someone has amassed a lot of wealth doesn’t mean a more complicated financial life will lead to better outcomes. From my experience, those who keep their finances simple, regardless of how wealthy they are, tend to have more personal freedom in their lives.

The other adviser on the panel had a different approach. He prided himself on serving the ultra-high-net-worth and stated that his typical client had 28 different investments, including, but not limited to, hedge funds, private equity, real estate and beyond.

I remember wondering how many limited partnerships his typical client had. How many K-1s did the client have to wait for each tax season? How many capital calls were required on a quarterly basis?

I recall reflecting upon the journey of his typical client. Just for the sake of example, let’s say a couple launched a business, worked like mad for 30 years, sold it for tens of millions, and was looking forward to a nice retirement marked by simplicity and freedom. As I thought about it, I realized that whether those clients had been invested only in index funds or whether they had 28 unique holdings would have absolutely no impact on their standard of living. They’d have enough money that they could bury it in a tin can and still do just fine.

So, even if (and this is a big if) those private investments outperformed, what’s the point of making the clients' life more complicated?

But going beyond the inconveniences created for clients who have unnecessarily complex financial lives, the more unique or specialized an adviser’s practice is, the less marketable it is to potential buyers. That’s because the layers of complexity not only make it more difficult to “train up” other advisers, they make it painstakingly difficult to integrate into larger firms.

Chronologically, it’s well known that the adviser demographic is an advanced one. If you're at a stage in life when it’s time for you to put together a succession plan, either by bringing in a younger adviser or by merging with a larger firm, among other advantages, you’ll probably have more options and will be able to command a higher price if you emphasize simplicity.

[More: Your clients will show you the way]

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.