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Dos and Don’ts of Passing Down Your Practice

The average age of financial advisers in the U.S. has climbed north of 50 years old and approximately 43 percent of the total population of advisers are between ages 55 and 60. With so many advisers nearing retirement, the industry is facing a crisis when it comes to succession planning.

Typically, when the owner of a financial advisory practice wishes to retire, they’re faced with one of two choices: they can sell their firm to an institutional buyer, such as an RIA rollup shop, private equity firm or a regional acquirer; or they can bring in a junior partner and gradually introduce them to his or her clients and transition the book of business over bit by bit.

Ideally, firm owners prefer to transition their book of business to a junior partner over a five- to 10-year period. However, throughout my career helping small business owners transfer ownership of their firm and retire, I have found that financial planners ironically have some of the worst track records when it comes to successfully planning and executing an ownership transfer.

In this light, here are a few dos and don’ts when transitioning ownership of your business to a younger partner:

Don’t delay. It’s never too early to start the succession planning process, which can take more than a decade from start to finish. It takes years to introduce a new partner and provide them with the training and resources necessary to keep the business afloat. Too often do I see advisers continue to work into their senior years only to realize they have no exit strategy in place. Consider your clients; who is going to take care of them after you leave? And how are you going to monetize the business you’ve worked to build over the course of a lifetime?

Do get your younger partner involved in discussions and meetings with your larger, more significant clients throughout the transition process. Junior partners are typically brought on initially to handle an adviser’s smaller accounts. While this is all good and well in the beginning, it does not provide the new owner with the proper experience and training required to serve the bigger clients, which will be one of their primary responsibilities once ownership is transferred.

Don’t forget about the intangibles like the management style, likeability and cultural fit of the new owner. Some financial advisers still run a very formal shop with pressed white shirts and systemized client communication techniques. Others are more comfortable in khakis and a polo shirt, and prefer a more casual style of correspondence with clients. Also, does your new partner fit in well with other employees at the firm? Making sure you two see eye to eye in these categories can really smooth out the transition process, both for yourself and your clients.

Do go over the company’s financials. Not only must you teach the new partner how to handle your clients, you must also teach them how to run a business. What size client is most profitable? How does the business manage its costs? How do we manage the staff? Many new business owners overlook these extra responsibilities, which can be overwhelming at first. But as the outgoing partner, you need to make sure the business is left in a position to remain profitable. Typically, selling advisers are paid out in installments. If the business fails, these payments could stop, leaving the outgoing adviser in a sticky situation.

Don’t think you won’t need outside help. Hire a team of lawyers, accountants and even a management consultant to delegate the distribution of responsibilities throughout the process. Many times the incoming owner wishes to take over more responsibility at a faster pace than the retiring adviser is comfortable with. Management consultants go a long way in easing this tension.

Do be open to some degree of change. Relinquishing your power and watching the business you spent years creating change in front of your eyes can be a difficult pill to swallow. However, standing in the way of the new adviser’s vision will only muddy the process. You must accept that some aspects of your business are going to change under new ownership. The sooner you come to terms with this reality, the better.

No matter how much you plan, transitioning your business will almost inevitably come with a few bumps in the road. However, following this list of dos and don’ts will put your firm in a much better position to smoothly and successfully navigate the transition. Many of your clients have worked with you for decades, and you owe it to them as their financial adviser to ensure their financial futures are maintained. The first step in doing so is to make sure your business is taken care of after you’re gone. So take this transition process seriously and start early. Your clients’ well-being depends on it.

 

Stephen Brubaker

Stephen Brubaker CFP® is president and wealth management adviser at Exit & Retirement Strategies, Inc. He holds his bachelor of science from Miami University in Oxford, Ohio.

 


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Building Growth Through Succession Planning

Succession planning isn’t just an “end-game strategy”; it is the key to growth and sustainability.

The specific goals of the succession planning process depend on the founder and his or her circumstance—including age, health and family demands—and they vary case by case. The point, though, is to take a methodical and practical approach to building a business that will endure beyond the builder. Four key areas to concentrate on are:

  1. Building strong, sustainable growth;
  2. Creating a focus on the bottom-line;
  3. Implementing a practical and reliable continuity plan; and
  4. Designing an income perpetuation strategy for the founding owner

The first is perhaps the most important. Building strong, sustainable growth for the business is supported by a clear succession plan in two ways. First, by incorporating next generation advisers who will be investing financially and physically as they buy in. One of the most effective ways to grow a business is to help the next generation build on the foundation the founder has already created and gradually transition ownership—and leadership. The next generation will learn not only how to “think like an owner,” but to be an owner. They will connect the daily goal of revenue production with the long-term goal of producing sustainable revenue in an efficient and scalable manner. They will make decisions that benefit the whole, not just themselves.

Second, growth through succession is about even more than just improving numbers. Strong, sustainable growth demands that the business owner increase their own capabilities as a leader—not just as a producer. As an executive of a multi-generational business, building the strength and depth of the entire team fuels continuous growth.

Cultivating ongoing growth in this way allows a founder to realize exponential value in the business they’ve built, while allowing them to plan for life after advising without worrying about the future of the business or the clients.

Unless the world of professional financial advisers discovers immortality or the fountain of youth, 100 percent of today’s advisers will see their careers come to an end, one way or the other. The only question is how you’ll help your clients transition from your advice and care to someone else’s. Will it be through a professional and carefully crafted succession plan; a last-minute sale to a friend or colleague; or will the clients be left to fend for themselves?

Building a business is about building for the future—your future and your clients’ futures. With a solid succession plan you not only promote growth—you build a legacy, and most importantly, you provide for your clients’ needs beyond the length of your individual career.

david_grau_sr

 

David Grau Sr., J.D.
President and Founder
FP Transitions
Lake Oswego, Ore.


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The Financial Implications of Selling Your Practice

Prior to selling a financial advisory practice, along with selecting the right buyer, it’s important to be knowledgeable about the financial aspects, including: price versus value and the aspects of the deal.

Price Versus Value
To begin, it’s important to know the difference between valuation and price. For example, you may think your practice is worth a certain dollar amount because of the hard work you have put into it and the wonderful clients you have, however the valuation may show otherwise.

Valuation looks at the entire enterprise value of the firm based on the methodology that is most appropriate for a given situation. Most valuation approaches are classified as: income approach (net value plus future potential); market approach (comparison to similar practices); and asset-based approach (tangible net assets determine fair market value).

While the debate continues as to which is best, and rules of thumb are suggested, the best advice is to seek multiple valuations.

When preparing for your valuation, the following factors are often key determinants for buyers and lenders:

Age of your clients. If a large number of them are nearing retirement, they may be considered less valuable than younger clients who are in the accumulation phase.

Number of clients. A smaller number of clients with higher net worth are easier to manage than a large number with fewer assets.

A buyer will also look at the current profitability of your firm and the amount of growth you have experienced over the past years. Equally important will be how you manage your business. For example, fee-based income is more predictable and looked at more favorably by lending agencies.

Aspects of the Deal
How you are willing to structure payments is an important element of the sale and can affect the buyer’s and loan company’s willingness to participate. Unfortunately, there is no boilerplate formula. On average payment terms were split between three payment types:

  • Down payment: 36 percent
  • Promissory note: 55 percent
  • Earn-out: 9 percent

Advisers need to keep in mind that a sizable down payment may be impractical because the assets are intangible. The bank can’t repossess a book of investments.

However, there are institutes that are set up to make loans of this type. The buyer or seller might also contact his or her B/D or custodian to see if it has a program available.

The promissory note allows the seller to receive fair value over a reasonable amount of time. Most sellers are paid in full within three to five years.

The earn-out compensates the seller a percentage of future revenues based on future performance. Performance can be based on gross revenue, AUMs, net acquired assets or any other measure both parties agree too. It’s a good way for buyers to be protected against an under-performing firm or sellers to receive the full amount of its worth.

The important thing is to set up a deal that you feel okay with and the buyer will be able to find funding for.

phil-flakes

 

Phil Flakes
Co-founder
Succession Link
San Diego, Calif.

 


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Are You in Retirement Without Even Knowing It?

Advisers deal with pre-retirees every day. Some of these clients are anxious to quit working, but many more say they’d like to work in some capacity once they retire. The 2015 Work in Retirement: Myths and Motivations study, conducted by Merrill Lynch and Age Wave, found that 7 in 10 pre-retirees want to work in retirement. In fact, it’s becoming so common that people now talk about “Retirement 1,” “Retirement 2,” and “Retirement 3,” with each stage representing a reduced schedule and set of responsibilities.

For advisers, this is easy to understand: “dying with your boots on” is an industry norm. Work in retirement may be different or happen at a different pace, with many tenured advisers putting in fewer hours and taking more time off, including sabbaticals. In any case, there’s a clear trend of advisers staying in the business longer—or not leaving at all.

The problem is when you slip into retirement mode without even realizing it.

Maintaining a Viable Lifestyle Practice
Many advisers are comfortable with the idea of running a lifestyle practice but bristle at the suggestion that they’ve entered “Retirement 1.” Whatever you call it—Retirement 1 or a lifestyle practice—there are several key points to consider if you want to keep your business healthy.

  • Am I still growing? By definition, healthy businesses are growing businesses. In our industry, that’s generally measured by assets under management or overall production. At a certain point in an adviser’s career, it becomes difficult to recruit new clients. Existing clients pass away or move into the distribution phase. Attracting new business to replace lost AUM becomes challenging as clients seek an adviser who will outlast them. When AUM starts shrinking, the business owner needs to assess whether the practice has begun to die on the vine, making it less attractive to potential buyers.
  • Am I keeping up with industry developments? Regulatory requirements, new technology, marketing strategies, emerging products that deliver answers to complex client issues—staying on top of all the developments in our industry requires a certain amount of time and commitment. Downshifting to a lifestyle practice shouldn’t mean letting your focus slip or becoming nonchalant about certain aspects of the business.
  • Do I have a documented continuity plan? No matter what kind of practice you have, going without one borders on unethical. The need for a continuity plan is well known, but unfortunately, many advisers still don’t take this essential step to provide for their firm’s (and their clients’) future.

A Personal Choice (But it’s Not Right for Everyone)
Mid-career advisers may observe the attractive lifestyle of more tenured advisers and think, I want that, too! For their part, millennial advisers entering the industry may look around and assume a lifestyle practice is the norm. But if significant growth is on your agenda (and for many younger advisers, it is), the activities that will get you there generally require putting in some evening, weekend and summer work.

Of course, how you balance work and life is ultimately a personal choice. In the independent world, as long as you’re compliant and your clients are protected, it’s no one’s business but yours. Just be sure you’re making the decision deliberately rather than simply falling into it.

Joni Youngwirth_2014 for webJoni Youngwirth
Managing Principal of Practice Management
Commonwealth Financial Network
Waltham, Mass.


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Letting Go of Relationships

Compared with professionals in other industries, financial advisers typically enjoy uniquely satisfying relationships with their clients. One reason is that “clients for life” is more than a catchphrase. Given the myriad of critical financial issues, life circumstances, and market volatility that can occur in any 10- or 20-year period, it’s no surprise that deep relationships develop.

But what happens when it’s time to let go of these relationships so a new adviser can take over?

Time for transition
No matter how competent the new adviser, nor how well honed his or her relationship skills, the new adviser is often stepping into a situation where both the original adviser and the client are grieving the loss of the relationship. Two things can happen: in the healthy approach, the client and the original adviser mutually agree to let go of the past and foster the development of the new relationship. In the unhealthy approach, the client and/or the adviser holds on to the existing relationship for dear life, which could undermine or even sabotage the relationship with the new adviser.

For example, it’s not unusual for the original adviser to think that his or her way of doing things is best. Although a new adviser may do some things similarly, the likelihood that his or her way of doing business will be exactly the same is small. That’s true even when the new adviser is the child of the transitioning adviser. If the original adviser feels the need to swoop in and mediate, the relationship between the client and the new adviser certainly won’t get off on the right foot.

So what can advisers transitioning out of the business after decades-long relationships with clients do?

  • Acknowledge that leaving one’s career may create a sense of loss. For some, you may even go through a grieving period similar to when you lose a loved one. In such cases, it may be tempting to keep tabs on client relationships. If keeping tabs is purely personal or “golf-based”—fine. But the original adviser should avoid interfering with the professional relationship between the client and the new financial adviser.
  • Those transitioning out of the business should seek the counsel of those who have experienced the same process. Sometimes the transition out of a long-term career can lead to depression, especially in the last third of life. Another adviser who has already gone through the transition process may provide a good sounding board.
  • Plan for a transition early. Both the original and the new adviser should budget ample time for joint meetings with clients to transfer knowledge and to foster the transfer of the professional advisory relationship.

The bottom line is both advisers must do what’s best for the client—even when it means letting go.

Joni Youngwirth_2014 for web

 

Joni Youngwirth
Managing Principal of Practice Management
Commonwealth Financial Network
Waltham, Mass.


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Is Retirement Catching? Financial Advisers Might Soon Find Out

There’s a paradox in our industry. On one hand, we worry at the number of advisers choosing to “die with their boots on” and neglecting to put an effective succession plan in place. On the other hand, we worry about reports like the one from Cerulli Associates, which suggests that more than one-third of U.S. financial advisers are planning to leave the business over the next 10 years. Once those boomer advisers start retiring, could we see a shift tantamount to Malcom Gladwell’s The Tipping Point? It’s possible—and it could come sooner and faster than predicted.

What might hasten advisers’ retirement?
There are a number of changes taking place both in our industry and in boomer advisers’ lives that could lead them to catching the retirement bug sooner than they expected to:

  • Although many boomer advisers imagined themselves adopting a lifestyle practice, the ripple effects of various regulations, including the Department of Labor’s new fiduciary rule, may cause some to stop and rethink what the future looks like and if they want to go through the hassle of making necessary changes to their practices. It might be easier to get out while the getting is good.
  • Advisers of a certain age may begin to notice that lifelong colleagues, associates, and friends no longer attend industry conferences. These advisers are often the oldest ones at these events, and it may cause them to think twice about attending in the future. This can start them on the slippery slope to falling behind.
  • Increasingly, industry media are focusing on the benefits of technology to our business. Unless they have been diligent about keeping up with the technology revolution, tenured advisers may not be motivated enough to continue learning, leading them to fall even farther behind.
  • Clients, family and friends may increasingly ask boomer advisers when they are going to retire, while former colleagues regale them with stories of exciting vacations to faraway places. Advisers may start to realize that there’s less time remaining in their lives to do the things they’ve always wanted to do.
  • Both physical and mental health become concerns the older one gets. As mental acuity diminishes, advisers may be asked to retire for the good of the business. Or, nagging aches and pains may need medical intervention and extensive recuperation time.
  • When a spouse retires and wants to do things together or needs medical or physical assistance, advisers may be pressured to leave the business.
  • Valued clients may begin to pass away. If these are the same clients from whom the adviser derived a sense of purpose, he or she may feel dissatisfied with the business.
  • Given that the next generation of clients often doesn’t retain their parents’ advisers, and prospects typically want an adviser who will “outlast” them, assets under management may begin to decline. Advisers know that this ultimately affects the value of their business in a negative way, so they may choose to get out early.

This is the reality of growing older in a demanding and evolving industry. And though we’ve tended to believe that many aging advisers aren’t ready to throw in the towel, experiencing one or two of the circumstances on this list can make an adviser susceptible to catching the retirement bug.

But it’s not all bad. Some may be lucky enough to discover that there’s life after being a financial adviser.

Joni Youngwirth_2014 for web

 

Joni Youngwirth
Managing Principal of Practice Management
Commonwealth Financial Network
Waltham, Mass.


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A Client Base for High Valuation

Wealth management professionals face a key business constraint in the limited number of advice-giving hours in a day. Since revenues are ultimately tied to the value of each advice hour, at capacity, an adviser’s growth options are limited.

The competitive market eliminates the option of raising fees. Another alternative is to increase the productivity of each hour with two oft-cited tactics: 1) gaining productivity through technology; and 2) replacing low-AUM clients with high-AUM clients. Certainly, expanding to the emerging affluent segment would be counterproductive to a one-to-one client service model, but what if a scaled service model were used?

Culling Based on AUM Fails a Growth Strategy
An advice hour spent with a high-AUM client will produce more revenue than one with a low-AUM client. In a one-to-one relationship model, culling low-AUM clients improves efficiency per hour, but there are three critical pitfalls to this approach for an advisory firm interested in a larger market footprint and a higher firm valuation.

1. It’s hard to win high-AUM clients. The higher a prospective client’s AUM, the more intense the competition and there can be only one winner. When an adviser loses to the competition, those hours spent in marketing represent an opportunity cost.

2. Withdrawals and wealth transfers. The largest segment of the high-AUM market is made up of people in or near retirement. As the years pass, a high net worth client’s AUM will be flat or declining through withdrawals and/or wealth transfers.

3. A firm’s valuation has a forward view of AUM. P&L performance is an important input to a firm’s valuation, but this only shows current-year metrics. Most important to an acquirer is the future AUM profile. A client base made up of high-AUM retiree clients will be much less attractive than a client base with a significant portion of clients in their wealth-accumulation phase.

The Emerging Affluent Segment’s Appeal
The emerging affluent client (AUM between $100,000 and $250,000 and under 45 years of age) will grow to high-value AUM over time through career advancements and wealth transfers. Since there are tens of millions more in this segment today than those with AUM greater than $1,000,000, there’s a large prospect pool in every local market. These are important factors in valuing future AUM.

The tactical issue is developing an advice and investment package, combined with volume service techniques, allowing an adviser’s advice-giving hours to be efficiently utilized. Should an adviser institute such a solution (and in parallel with the adviser’s high-AUM client base), future AUM grows exponentially as does the firm’s valuation.

Keeping Advice as the Key Differentiator
The emerging affluent have common planning needs such as budgeting, education, retirement, tax management, and portfolio design. Indeed, the concepts within each planning category hold tight individual to individual, with the differences only on the demographic margins—like the number of children, income, budget priorities, etc.

People with common needs benefit from a common solution; manufacturers apply this principle in designing products and producing in volume.

An adviser developing a broadly applied investment solution for the emerging affluent’s need inventory is in keeping with this segment’s wide acceptance of portfolio models such as target date funds for retirement. The key difference is the adviser builds the solution for mass consumption with his or her own advice/counsel/wisdom—the adviser’s primary differentiating force—instead of licensing a vendor’s off-the-shelf assembly and relegating the solution to a commodity (i.e. other advisers with the same vendor package would be indistinguishable).

Technology for Mass Personalization
Technology paves the road to upholding a differentiated advisory service while also serving volumes of emerging affluent clients simultaneously.

  • A proprietary “robo-adviser” instilled with the adviser’s own planning, portfolio, and investment advice that delivers the tactical solution to clients’ needs.
  • Scaled communications like CRM, a portal, email, and social media that provide the service and support component necessary to keep the relationship on track.
  • Periodic group meetings activate adviser-to-client relationships.

The hand-in-glove fit here is the emerging affluent are highly accustomed to, if not preferring, these technology-based interactions.

Right-Sizing Processes to AUM Segments
Using scaled service delivery methods generates important operational leverage. The block of hours used to develop the advice and service package is distributed across many clients wherein each new client in the group further improves the profit margin of those hours. This strategic profile adds measurably to the firm’s year-over-year profits, but also its valuation, which is a winning mix by all accounts.

Kirk LouryKirk Loury
President
Wealth Planning Consulting, Inc.
Princeton Junction, New Jersey