From the November 2007 issue of Investment Advisor • Subscribe!

Heirs and Omissions

In planning for succession, think of your practice as a family business

If you had a career wish for your daughter or son, would it be as a financial advisor? If that wish came true, could you also imagine your offspring working with you one day? Now--if you've gotten that far--could you envision your child becoming your partner and, ultimately, your business heir?

This vision differs greatly from how many advisors think about their succession plans. In fact, the idea of anybody close to them taking over their business may be the furthest thought from their minds--and yours, especially in light of recent noise about consolidators and banks paying big multiples to acquire advisory firms. For many, succession planning has become "sale" planning, with more focus on the deal itself than on the process of ensuring an orderly transition. In addition, these high multiples are enticing and often lead to the decision to omit family members as potential successors, as their currency of love and devotion may not be enough to help you plan your retirement.

There are many reasons to resist the idea of bringing children into the business, not the least of which is that it may not have occurred to you that someone from your own gene pool might be as good (or better) than you as an advisor. After all, you've had a chance to observe everybody in your family up close, and may have determined that the annual food fight at Thanksgiving is about as exhilarating a family interaction as you are willing to indulge.

Consider your options as they relate to succession planning:

- You could sell to a consolidator or institution, and leave the management and client succession issue to the buyer.

- You could turn over the practice to a key employee raised in your culture and already connected to your clients.

- You could bring in a new advisor whom you can groom to be your successor.

Within these choices, is there a role one of your children can play in the transition?

First, Determine the End Game

It may be helpful to first resolve what your own end game is with your business. To capitalize on the current wild sellers' market? To make enough on the sale of your business to eliminate financial worries in your retirement? To ensure your clients are well tended to, and that your staff is not left in the lurch? To provide career opportunities for others? To build a legacy and a continuing presence in the marketplace?

The answers will differ, depending on personal circumstances and general disposition, and no single answer is wrong. However, we usually find that people who build a business to last will have created a business to sell. When practice continuity, instead of business succession, becomes the primary goal, firm owners are open to many more possibilities for facilitating business transition, while still achieving personal financial goals.

Building a practice to last means developing a deep bench of talent with whom your clients work and who enhance the way you do business; leadership at all levels; a commitment to processes, protocols and quality control; strong and growing profitability; a sustainable and systematic business development effort; and an environment in which motivated people can advance in their careers.

Clients often feel more confident that they will not experience a disruption when their advisor retires if they know who will be taking over the reins and responsibilities of working with them. Employees also are able to stay focused when they have reasonable confidence that the culture, processes, and approach to business will not be materially disrupted with a new leader. While there may be temptation to shrug off concerns of your clients and staff when somebody is waving a big check under your nose, the reality is that most acquisitions contain terms tied to performance, growth, and continuity. Anything that puts those elements at risk could result in a lower purchase price--or, more likely, no premium over the agreed-upon base price.

The End Game and Your Children

So now, you say, what does this have to do with bringing children into the business? Next to the issue of no time and not enough of the right clients, the biggest issue advisors are wrestling to resolve is the question of hiring and keeping the right talent. Your children are people too, and have quirks not unlike the other candidates you will interview. However, in the case of your children, you have the additional benefit of having had a lifetime to observe them.

At this point some might be wishing this discussion away. There are parents we know who, at their core, believe if they hadn't hired their kids, the latter would probably be jobless, homeless, and rudderless. There are also those who relish the prospect of being near their children more frequently and through the workday, but cannot envision that their kids are anything but kids. Yet there are others who love the idea of working with that very bright, accomplished child described on their "My Kid's An Honor Student" bumper sticker, but fear creating friction among the other siblings who are not in the business. So the strange psychology of relationships between children and parents needs to be addressed, lest your plan become a reality show gone wrong (Fellow IA columnist Olivia Mellan writes extensively on this subject--see www.investmentadvisor.com for those articles focusing on family dynamics). But if you can get past the sometime weirdness of it all, what do you think of this idea: your children as heirs to the enterprise. What would you have to do to make this work?

Take Control

There are several steps we recommend if you decide to go down this path.

Exposure--While they are in college, or even high school, bring your children in part-time to see how they take to the business. Make sure they see the good, the bad, and all that you have to do to be an excellent advisor. In addition, this allows them to experience what it will be like to work with a parent. If you and they can make it through their rebellious years with minimal bloodletting, you may find that you have raised a pretty good employee, and eventual partner and successor.

Psychometric testing--There are many tools available to evaluate the aptitude, motivation, and interests of individuals. We are all hardwired to perform and sustain an interest in certain types of work. Identify the traits you think are important or, better yet, test others who you think represent the best of financial advisors, and use that as your benchmark.

Education--Think about the practical and academic training one will need to become a competent advisor and a competent business manager. Often the kids will get a pass in the practice to pursue proper certification, but parents should hold their children to the same standards and expectations as anybody else they might hire--especially if their children are to fly solo and succeed them.

Experience--Encourage your children to work someplace else after college, so that they get a taste of the real world first. This doesn't have to be a job in a financial advisory firm, just a place where they can see how others manage, how other cultures flourish or flounder, and how other career opportunities may enlighten them. You never want to have your kids resenting Mom or Dad for browbeating them into joining the family business before they think it's a good idea themselves.

Evaluations--We often encourage readers of this column to deploy systematic evaluations of all their staff, both written and verbal. This ranks among the least pleasant activities of most supervisors, but often is the most beneficial in helping people to develop. Again, your kids should be held to the same standard of behavior and performance as everybody else. It's also a good idea to use upstream evaluations, in which staff responds to questions about others in the firm--you can gain an incredible amount of insight into how your children will do when you read the objective assessments written by others.

Fair Compensation--As practices become more sophisticated, they are using published compensation data to benchmark salaries for all staff, and they are implementing incentive plans tied to measurable expectations. By being consistent in how everyone is rewarded, you will be better prepared to help your children understand what they have to do to earn more money for the work they are doing.

Communication--Be very, very careful about how you and your children communicate at work. It's important to separate family issues from business issues, and to carry on discussions like responsible adults and business partners. It's also a good idea to take time off from talking about business at family functions. There is enough potential for tension in such relationships without bringing business disputes to every holiday dinner, wedding, and wake.

A Good Mix

The business of financial advice lends itself well to becoming a family enterprise. It's typically a local business based on trust and respect, in which relationships are key to future growth. Further, many practitioners are reluctant to ever retire completely, so when family relationships are healthy, often children are more comfortable tolerating-- if not encouraging--their dad or mom to continue coming into the office and contributing on a part-time basis. Inevitably, family-business-succession planning has its own set of issues, but if the parents and children involved can manage through the natural conflicts and build on the unique dynamics of their relationship, most practices have a great opportunity to last, at minimum, through another generation.

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