Yes, the headline is a bit over the top to get your attention. But you'd have to admit that for all the talk about succession planning in the financial advice business, there are few actual plans in place and few reliable models for training and transitioning employees to owners.
To be sure, there is an active market for advisory practices as the investment bankers in our recent
succession planning webcast described. Still, selling out to another advisory firm is one thing; establishing a business and then passing the leadership and ownership baton to an in-house up-and-comer is something else.
So let's go out on a ledge and examine the extreme position: Advisers should forget about succession planning and think of their business as either an entity that will be sold to outsiders or one that will be dissolved when the adviser decides to retire.
The reason succession planning isn't working — and probably can't work, in my opinion — is that successful advisory firm owner-operators are fundamentally different in temperament and experience from those they hire.
Most successful advisory firm owners are unique combinations of salespeople and investment quarterbacks. Typically, they started their careers as salespeople, spinning their wheels to find clients for securities or insurance products. Once they gained traction, they invariably shifted gears and became more advisers than product pushers, although they retained the salespeople's drive to gather more assets and clients.
Regardless of how these successful advisers operate — within a wirehouse or regional firm, or as an independent broker or RIA — they are essentially loners. They barely tolerate management, and most would admit that they're not great at managing others, either.
But like 50- and 60-year-olds in other walks of life, when advisers enter their most productive working years, their thoughts turn to mentoring, leaving a legacy and, obviously, gearing up to cash out. Grooming an internal candidate to take over a successful business — a son, a daughter or a longtime younger employee — would seem to be the most natural solution. So why doesn't it seem to work?
Children of successful advisers may look at their father's business as a lucrative, but time-draining, enterprise that they may appreciate but don't wish to be part of. Many even resent the time and energy their father devoted to the business, which they may perceive as time taken away from them.
Long-time employees present another psychological profile. They are not entrepreneurs and probably not loners in the way their bosses are. Some may have come up as planners or customer service reps, so while they probably get along well with other employees and clients, they may not have sufficient fire in their belly to satisfy the adviser/owner. Then again, if they have the sales hunger, they may not have the customer service orientation or investment smarts necessary.
If good fortune strikes and the internal person has both the requisite sales drive and investment savvy, they probably lack something else: money or the willingness to take on a level of debt necessary to satisfy the price demands of the adviser/owner. Many successful employee advisers probably also believe that their years of service constitute a form of equity, which makes owners' price demands excessive, in the prospective buyers' eyes at least.
So where does that leave advisers looking to sell down the road?
First, don't rule out succession planning just because it may be futile (a little planning never hurt and, hey, you could get lucky, despite the odds).
Second, begin structuring your firm so that it's more process-driven and less you-driven. That will help you sell it.
Third, start networking and schmoozing, and get to know advisory firm owners who share your investment philosophy and style, and are about 10 to 15 years younger than you. They're the ones who will probably buy your business.
