YOUNG ADVISERS FACE LONGER, ROCKIER ROAD TO OWNERSHIP

Young advisers raring to make their mark in the financial planning profession will find themselves in an industry dealing with shelved succession plans, lower firm values and a tightening job market.

First of all, opportunities to buy into an advisory firm may not even exist — or at least they won’t be as abundant as they were before the downturn.

The recent turmoil in the financial markets may compel adviser-owners to hold on to their stakes and go back on promises they made to begin selling off part of their firms, said W. Eric Hehman, chief executive at Austin (Texas) Asset Management, which manages $330 million in assets.

That’s because they are simply not interested in selling their stock at lower valuations as firm assets have declined, he said.

For outside advisers looking to purchase a stake in a firm, valuations have declined between 20% and 25% over the past two quarters, said David Goad, president of Succession Planning Consultants in Newport Beach, Calif.

Only 11% of advisers were interested in taking part in the external buy-in model in the future, compared with 19% in a 2005 survey, according to the preliminary results of a survey that will be released by Succession Planning Consultants next month.

The survey also found that 78% of advisers expected to employ an internal succession plan, compared with 66% in the 2005 survey.

“For a young adviser, getting your foot in the door and internal succession are key,” said Mr. Goad. “When an individual looking to sell brings a young adviser into a firm and their presence is in front of the client base over a period of time, the clients are more accepting of a younger adviser.”

Some pending succession deals are simply in the midst of blowing up.

Others are being undercut because owners inflated their firms’ worth and incorrectly figured that employees would be able to use the resulting profits to pay for their stakes in the firm, said Michael Kitces, director of financial planning at investment advisory firm Pinnacle Advisory Group Inc. in Columbia, Md., which manages about $600 million.

Nathaniel Gehring, a financial planning assistant with Appleton (Wis.) Wealth Management LLC, who joined the firm in 2005, is debating whether he should purchase a stake in his firm without truly knowing what the business is now worth.

“It’s a tremendously difficult situation to contemplate at this time,” said Mr. Gehring, whose firm has around $130 million in assets under management.

Firms dealing with lower revenue and higher costs are also putting off hiring advisers.

“Firms want to delay hiring to see if there is more client attrition and how it affects the ability to grow in 2009, said Mr. Kitces. “For a young candidate who is applying for a job, it is going to be more competitive than ever over the next few months.”

The news on the job front, however, is not all negative.

While some of the larger firms are not hiring or offering paid internships, some independent firms are bringing in fresh faces to accommodate the heightened demand for services, said Deena Katz, associate professor at Texas Tech University in Lubbock, who is the internship coordinator in the school’s Division of Personal Financial Planning.

“Independent firms seem to still be hiring, and they are looking to bring in younger people who can cost them less money,” she said. “We are seeing a little bit of a slowdown, and I know that it will pick up in the next few months.”

The current market is expected to be a great learning experience for new advisers.

Having to talk to clients during a down market is a “career-defining experience for young advisers,” said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC in Jersey City, N.J.

“Everybody who is in the profession has to experience some sort of crisis or trauma in their career to really become well-rounded,” he said.

Andrew Coen contributed to this story.
E-mail Aaron Siegel at [email protected].

“Firms want to delay hiring to see if there is more client attrition and how it affects the ability to grow in 2009.”

Michael Kitces

Director of financial planning

Pinnacle Advisory Group