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

Fresh Look at a Fresh Start

Welcome to the demographic squeeze: Older partners are looking to cash out shares; younger would-be partners are itching to buy in. The older partners deserve to be fairly compensated for what they've built; the younger would-be's--strapped to mortgages--are also strapped for cash. Firms are liquidity poor but asset rich. What to do?

Mark Hurley, along with The Milstein Family (which owns Emigrant Savings Bank), formed the Dallas-based Fiduciary Network and made an offer that looked good to Regent Atlantic Capital LLC in Chatham, N.J. "We liked the deal. We knew, respected and trusted Mark, but hadn't looked at all our options," says Christopher J. Cordaro, a partner and chief investment officer. With the help of New York-based M&A specialists Cambridge International, they checked out other choices. "Before we got married, we wanted to see if it was the right union, so we hired Cambridge managing director John Temple to bring us a number of different acquirers or partners to see if any were a good fit, and we feel confident that what we did was the best deal for us," Cordaro adds. The Fiduciary Network ended up buying some of the older partners' shares for a percentage of the profits.

It's ironic that baby boomer generation owners and partners who are benefiting mightily from boomer retirement savings are themselves facing the same issues that confront many of their clients. It's time for these wealth managers to take their own advice and make some decisions about succession.

"It seems that we in the wealth management business are not practicing what we preach, because if we leave the sale of our practice to chance, our heirs and clients will not benefit," notes Robert Jackson, president of Jackson Financial Advisors in Scottsdale, Ariz.

"Everyone's glib with tales about what value advisors are getting for their practices," says Mark Tibergien, now CEO of Pershing Advisor Solutions LLC, and long-known as a consultant with Moss Adams. Two-times revenue is what people are using as a rule of thumb. But there has to be a tempering of the frenzy over multiples. "You not only have to have an ownership transition plan--what [multiples] the owner wants to get out of the sale--but there also has to be the client transition plan, looking to the needs of the clients," he reminds. "If you fail to plan on how this will occur looking toward the future growth of your firm, then you will undermine your payout or windfall."

David Grau Sr., founder and president of FP Transitions, in Portland, Ore., acknowledges the "big flurry" right now in the market over multiples. And citing research by Tiburon Strategic Advisors that puts the average age of buyers at 55 while the average age of sellers is 57, he notes that there's not a lot of time in between. What Grau foresees is advisors selling a part of their practices--likely 25 clients--to an experienced advisor. "It's a partial book hand-off, one's B and C clients, while you keep the A customers," Grau explains. "When you do this, you maximize your controlled exit. That successor becomes your succession plan. You continue to work with another wealth manager, maybe even share offices. This bumps out your retirement timeline usually; you can retire later this way." Since most advisors have a "die at my desk" mentality, Grau says this gets their attention. Now they understand that they need to plan for this.

Selling and Succession

Yet for a majority of firms, selling is seen as premature. Firms are growing healthily, making this definitely a sellers' market. Owners fear cashing out now only to discover they could have received twice the amount if they'd only waited two or three years. Logically you know that you need a succession plan, that you can't live forever, but you don't want out while the money's pouring in.

"I am a type A," admits Greg Gardner of The Gardner Group in Dallas, "and I don't imagine slowing down." He's also the exception to the rule--he's just 38. "But I see myself working with a smaller, more defined client base in the next 20 years."

Gardner's overall goal at this point in life is not retirement but the establishment of a formal procedure to cover life's 'what-ifs.' "I have a fiduciary responsibility to my clients. When I have husbands and wives sitting across from me, and I address their mortality, I have to think they are considering the same about me. I want these multimillionaires to be comfortable with me and how I will be handling their financial plans, feeling comfortable that my firm is prepared."

He continues: "I don't want to wait 20 years to put my succession plan together. Having one in place and coupling it with training is my way of attracting employees as well."

Regent Atlantic, too, is "betting on all these young folks by offering training and mentoring programs," says Cordaro. This can be looked at as the generational shift. Yes, deals like Regent's with Hurley and the Fiduciary Network put more responsibility for the firm's growth on the younger generation, but through training and mentoring, a path is created at a crucial time for firms facing succession dilemmas, offering ownership and a real stake in the firms that ensures the younger partners' own futures.

Very few advisors actually expect total retirement--they built their firm, their baby, and "They want to die with their boots on," as Philip Palaveev, partner at Moss Adams, explains. Older partners and owners see themselves perhaps working fewer hours. Can't be a part-time owner? Not in his firm, Cordaro says. The other side of this is it's hard giving up control. Many smaller firms stay small because [the principals] like to control everything.

That desire for control can come in handy for succession planning, says Grau. "When you plan for succession, you can control your exit over five or six years. This way you are not subject to the market--it puts you back in charge."

Grau adds that many advisors came from wirehouses where they were "employees" and are only now recognizing that although they don't have a lot of tangible assets, they are sitting on what they are coming to understand is worth $1.5 million to someone else.

Succession plans take many scenarios--based in large part on the size of the firm, the older owners' or partners' desires to spend more time golfing or fishing, and basic human nature: No one wants to miss out on the new version of the dot-com boom--the multiple frenzy! Consolidators, custodians, broker/dealers--all want to help advisors in their planning, too. Says Grau: "Wachovia Securities Financial Network is providing its top 60 advisors with the means to create continuity plans--both valuations and succession plans. It's smart because they want the assets to stay with Wachovia, and, at the same time, they're helping the advisors to look beyond their day-to-day activities and plan for the long-term."

Consolidators--like Fusion Financial Group and its Fusion Advisor Network--are either buying up firms with an eye to an eventual IPO or to creating a sort of franchise framework for sharing resources. Wealth managers factor such possibilities into their succession planning scenarios. Several wealth managers note that they have had advisors come to them in the past six months asking if they would be part of their succession plan--among them Bob Jackson in Scottsdale, and Cordaro at Regent Atlantic. "A firm with a wealth manager in his 50s or 60s has approached me to take over his practice," says Cordaro. "He's a single practitioner who wants to stay that way, but wants to know there's a succession plan in place."

The Regent Atlantic Story

Regent Atlantic, with $1.8 billion in assets under management, was attracted to the Fiduciary Network because it provided liquidity. "If there was no Fiduciary Network, we would have had to sell at a deep discount. We were motivated in that we could do well by the next generation," Cordaro says.

Regent Atlantic was approached by rollups, or consolidators, as well as community and money center banks. "We realized two years ago that we were running out of time to internally finance our growth--there wasn't enough time to add new partners," says Cordaro. Sometime in 2000 or 2001, they held a business strategy meeting. "We knew we wanted to grow larger quicker, and we first thought about merging or buying another firm," Cordaro recalls. "We spent a year talking to every firm in our geographic area. We found that many are 'lifestyle' practices--not with the same motivation--plus we'd have to deal with huge cultural issues in a merger scenario."

New Ideas

Bob Jackson of Jackson Advisors has taken an earn-in approach. Through this plan, his designated successor, Jared Roskelly, earns a certain percentage of the business every year to gradually equal 20 percent. "He's taken on a proprietary interest," explains Jackson. "I treat him like a full partner. Our clients love him." It helps to be able to explain the succession plan to clients. "They can see I'm gray-haired, 62 years old, and they see my partner is half my age. They see I have provided for long-term continuation. It was in their minds, they admit it, but they're just too polite to come out and say it. Since they are turning over lots of money to us, trust is a very big deal. They need to know this relationship is long-term." Jackson Advisors has approximately $100 million in assets under management. Their broker/dealer is Cambridge Investment Research.

When Pershing's Tibergien was told about this succession plan, he called it, "a fresh approach--new and different. The process of transition planning uses both science and imagination," which is ironic: Jackson had actually approached Moss Adams, Tibergien's former employer, but they demurred because they had not yet dealt with earn-ins.

Greg Gardner is currently discussing some of the various ways a buy-in will occur at The Gardner Group. "I imagine 5 percent to 15 percent will be transitioned or sold somewhere between 30 and 60 months, based primarily on a revenue multiple, probably two times," says Gardner. "We have established our growth targets for the next five years in which I want us to exceed the growth rate of the last five years, which was 15 percent. I told my partner-designate, Victor Garza, director of operations, that in my eyes, this will truly show his value."

Services Abound

No wonder valuation experts and a rather new suite of services revolving around a database are popping up to help advisors. "We're just launching [our database] to help advisors grow their businesses, one way of which is to find a successor," says Nick Stuller, president of Discovery-The Financial Information Group in Shrewsbury, N.J. The advisory business was in its infancy 15 years ago, he says, and now that owners have grown older with their businesses, "Most practitioners are not thinking of not working at all--they love what they do," says Stuller. "They want to work fewer hours, work when they want to work." Stuller worked with a husband- and wife-owned advisory firm that has just started to ease their son of 28 into the firm; the parents are 56 and 57 years old.

Advisors can use the database to search in their own state to find a list of possible contenders to eventually take over their business. "Advisors hire us and research our listings with the goal of recruiting a successor," says Stuller.

Wealth managers are latching onto the idea that succession planning makes sense. And the importance of this planning often dawns when advisors understand the value of their businesses. A typical "Aha!" moment: "If my practice is worth $1.5 million, I'd better protect that!" Contractual continuity and a smooth, seamless hand-off can be achieved--while reaping some serious cash, too.

Janice Fioravante wrote about creating a paperless office in February.

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