From the January 2008 issue of Wealth Manager Web • Subscribe!

The Clock is Ticking

I have always found it fascinating how financial planners can seem so comfortable advising clients about buy-sell arrangements, key person coverage and other business issues, yet we often neglect our own practices. I've seen a number of surveys that indicate most planners don't have much of a plan for the future of their own practices. As more people enter into long-term relationships based on promises of long-term--if not lifetime--service, the importance of good planning for our practices will likely grow. Add in the simple fact that the average age of planning practitioners is well into the 50s, and we see a likely trend in the making. Many practitioners will be leaving the business to retire, pursue other interests or address health issues. How will they make that transition? I hope the retiring planners can figure this out because like everyone else, I will eventually leave the business. I'm hoping for a nice retirement--not the proverbial run-in with a bus--but like everyone else, I may not get to choose.

On that happy note, I thought I would spend some time discussing what every potential seller might want to be thinking about and acting upon right now. The fact is, this is a tough subject for a lot of practitioners. In this country, we have a bad habit of defining ourselves by what we do for a living. As a planner, you get to solve interesting puzzles, the rules change frequently, the environment changes even faster, and when all is said and done, you can have a profoundly positive impact on a client's life and family-- and you get paid for all this fun! That is not a bad way of life. However, the fact that a practicing financial planner has a fantastic job just makes it is easier to relegate these issues to the back of the mind. Here are five areas that popped to the front of my mine.Formulating a Strategy for Succession: It's incredibly easy to get bogged down in day-to-day work and let long-term strategic issues wait.You must set aside time to think ahead. Don't worry, you'll be back to thinking about the day-to-day soon enough, but if you want to increase the value of your firm and extract that value at some point, planning is the best way to accomplish that.

It may be a clich? and a frequent target of the Dilbert comic strip, but giving careful thought to a vision and mission statement can be a tremendous help. These statements act as a guide for the ways you and your staff will work with each other, with clients and others. It helps a lot if at least all high-level staff members participate in the process. You must put this all in writing, share it with staff, but most importantly, you must "live" it or it will become little more than fodder for the cynics within your operation.

These statements become a filter through which decisions are made. Done well, you will be clearer about who you want and don't want as clients and how you will and will not serve them. You also will be better able to discern which vendor or partner relationships add value to the organization.

The next thing to look at is how practices are valued. Many a transaction has failed to materialize due to unrealistic valuations with the seller believing the firm is worth far more than the buyer thinks it is. There is an oft-cited mantra that firms are worth two-times revenue. It isn't that simple.

Imagine firm A and firm B both have $1 million dollars in revenue. Firm A has antiquated technology, $150,000 more in fixed expenses due primarily to high rent, and no client has ever met with anyone other than the owner. Firm B has great technology, lower overhead, and a talented staff that clients know, like and respect. If you use the two-times revenue rule of thumb, you get the same valuation for both firms--which is clearly ridiculous. In truth, neither firm may be worth that much. To dig in on this topic, I recommend How to Value, Buy or Sell a Financial Advisory Practice by Mark Tibergien and Owen Dahl.

Developing People: Some folks are so busy working, that they don't pay much attention to their staff. Employees need to understand their roles, to have specific goals for their development, and to fully grasp the clear expectations of their employer. A practice is built upon relationships. Relationships that are readily transferable increase firm value. Practitioners simply must hire and develop talented employees who can take on significant responsibilities to leverage the principal's time and affect future transfers.

I talk with a lot of planners who do not take the time to formulate goals with their staff. Well crafted goals support the strategic initiatives of the firm, act to establish sound expectations, and foster professional staff development. Goals should be Specific, Measurable, Achievable, Results-oriented and Time-bound (easily remembered by the acronym SMART). Ideally, goals are established collaboratively with staff; resources and training needs are identified, and progress is reviewed periodically.

It may seem obvious, but compensation should reward goal achievement. Many firms view compensation as an expense to be managed. That's a mistake. Invest well in your people, and you will see a return--often quickly. Ongoing personal and professional development of your staff is critical if a succession plan is to succeed.

Get Over Yourself: Do you position yourself as some kind of guru? I hope not. Most marketing attention is often focused on the principal. This makes perfect sense to a point. Principals usually have the most experience and are most familiar to the marketplace. To increase value however, there has to be more. You may be the reason they come to the firm, but they need to stay because of your team.

One challenge is to design your practice so that your clients get a high-quality, consistent experience. A team approach to client development, retention and satisfaction seems more likely to accomplish this than over-reliance on one individual. I have found that clients don't expect one person to know or do it all and, in fact, they have a natural skepticism about people who present themselves as near omnipotent. Most clients find comfort in knowing that multiples of talented, bright people are acting on their behalf.

One critical element in valuing a practice is assessing the likelihood that relationships will be retained through the transition. The more interaction clients have with staff, the more likely it is that the trusting relationship you have built will transfer to an incoming advisor. So it is not enough to think about who your successor might be; you must plan exactly how to transition the relationships. How often should clients interact with the up-and-comers in your firm? How sophisticated should their discussions be? When do you give the staff full responsibility for each element of a given relationship?

Management of Systems and Processes:

If you have sound support systems in place, clients can have the good experience they're looking for--just as you promised them. Almost any task performed for more than one person can be systematized. The idea is not to stifle creativity or flexibility. In fact, the outcome should be to provide more time for creativity and flexibility where it is needed by saving time through greater efficiency.

Documenting processes is a colossal pain in the neck (among other places). Nonetheless, with good documentation it is easier to train people who are new to a particular task. It is easier for one employee to "cover" for another when needed. Processes are easier to refine and improve if they are adequately described and documented. Perhaps most importantly in today's world, it is easier to get technology to support a well documented process than one that is poorly mapped out.

Broken Records: A lack of good financial records has killed many a deal. I am surprised at how few practices can produce basic financial reports quickly, and how even fewer produce reports regularly. My partners will probably be laughing as they read this due to my well-known aversion to firm financial statements. Spending time reviewing budgets and expense reports is about as appealing to me as listening to fingernails on a blackboard. However, I know it would be stupid not to pay attention to these fundamentals.

One of the quickest ways to repulse potential buyers is to show sloppy, inaccurate or otherwise inadequate financial statements. Your credibility is instantly affected by how well you track important financial data.

Advisors need to maintain good financial records for compliance purposes, of course, but keeping good data should go far beyond what the SEC will want to know. Who referred that new client? Can you see how far off your budget you are at any point in time? How many of these variances are seasonal? Are they revenue variances or expense variances? Are there trends forming versus prior periods? Do you know your fixed costs per client? Has that new software really saved anyone time?

I don't know any planners who would object if their firm's value were to rise, yet not many take the time to engage in a succession planning process. I know a lot of practitioners who still love what they do and have no desire to stop. As you know, it is a great way to make a living and, for some of us, it is even a calling. But here's the thing: Even if you have no intention of leaving the business, engaging heartily in the planning process to ready your firm for a sale will result in a firm that is much easier to enjoy.

You don't have to be nearing a closing date for the process to evoke an intense emotional reaction. Maybe that is why so few undertake the task. If you keep putting off this kind of planning, keep in mind that the present can be positively affected quickly. Be careful though; if you make the present too much fun, you may never retire.

Dan Moisand, CFP, a principal of Spraker, Fitzgerald, Tamayo & Moisand LLC, in Melbourne, Fla., has been named one of the country's best advisors by several business and financial magazines. He is a past Chairman of the Financial Planning Association and a two-time winner of the Journal of Financial Planning's national "Call for Papers Competition."

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