I recently participated in a panel on succession planning, and I was struck by how every question was asked from the perspective of the advisor alone. All anyone wanted to know was how they could extract the most value from the practice. No one in the audience seemed to care how their succession would impact others, especially those who were dependent on them.
This got me thinking about a point I once heard a well-respected executive make, that every business has five constituents:
- Your clients
- Your stakeholders
- Your employees
- Your vendors and external partners
- Your community
Whether the subject is succession planning or some other management decision, it’s helpful to approach the topic from all five points of view. How will the decision you make impact each, and how will each constituency react?
We often hear the word “constituents” from politicians describing the group they are currently pandering to. It would seem that in many aspects of our lives, but especially in politics, we’ve lost the ability to consider multiple points of view before taking a stand; and worse, we’ve lost our ability to empathize with another perspective. This narrow-mindedness ultimately corrupts the process of critical thinking and produces a subpar outcome. It’s a bit like having all the strong rowers paddle on the right side of the boat, while all the weak ones paddle on the left—instead of moving forward, the boat only moves in circles.
On the other hand, the danger in overanalyzing or attempting to achieve consensus is that you fail to make a decision out of fear that the action may prove offensive to one of your constituents. That is not the point of contemplating multiple perspectives. The point of weighing a decision based on who could be impacted is to determine whether there is an optimal approach that will create the best possible outcome—all things considered.
The context of succession planning demonstrates the power of multiple perspectives quite well.
Consider Your Clients
It’s not always about you. Sometimes it’s about your clients. This is especially true when planning your exit. During your career as an advisor, you fostered a codependency with your clients and became their most trusted counsel. You earned their trust and respect and they increasingly relied on you as they aged. Then just like that—Wham!—you tell your clients you’re checking out and their accounts will be turned over to someone else in your firm, or worse, to a complete stranger.
Imagine how those clients will feel if you have not prepared them for what you may have thought was inevitable. They were certain you would help them to the end of their time, then suddenly they are thrust into the situation of having to evaluate the person to whom you sold your practice or even search for a new advisor.
This is an especially meaningful dilemma for advisors who regard themselves as fiduciaries. By definition, all you do should be in the best interest of the client. How would a sudden disruption in the advisor-client relationship fit with this definition? Should providing for an orderly transition of your practice and considering the relationship your clients have with the firm be a component of this fiduciary duty?
Consider Your Stakeholders
Many advisory firms consist of multiple practitioners who operate within their own silos, sharing expenses or a common name but not really interacting with each other in a strategic way to build the enterprise and ensure continuity. Even in cases where the principals do act in harmony, there is often a tendency to assume the business relationship will last forever.
Whatever the scenario, advisory businesses containing multiple stakeholders must develop awareness of how they prepare their transition. Just as with residents in a condominium, the community could experience material disruption if the retiring principal stake is transferred to someone incompatible with the other stakeholders.
In addition, the economic arrangement between the existing principals could be impaired by the sudden departure of one of the owners. What will happen to the clients? How will operating expenses be covered? Who is responsible for the staff that the advisor leaves behind?
It’s rare that the principals in a firm all retire simultaneously, but if departures occur in close sequence, how will the business be managed? If buy/sell agreements are in place, will the future payments be at risk if two or more principals retire within a short period of time?
Consider Your Employees
It’s not uncommon for loyal employees to stay with an advisory firm for many years, expecting that this will be their last career move. They’ve dedicated their working lives to their bosses and helped the firm achieve great success. While they know that the owner will eventually leave the scene, many employees may not have achieved the income or savings level that would give them the same financial freedom to retire.
Suddenly, the advisor decides to slow down or leave the business completely. While there may be no explicit obligation to ensure your staff is tended to, how will you feel when you throw their world into chaos? How will they manage with the disruption to the business? Who will be their new boss and how will they get along? If it doesn’t work out, will they be able to get jobs at the compensation levels they’ve become accustomed to, especially if they are late-middle-aged themselves?
Clearly each individual must plan for his or her own retirement and be prepared for the inevitable. But, as with clients, advisors and employees often develop codependent relationships where each benefits from the other. When the end comes, is there a moral obligation to help one’s employees prepare for the transition as well?
Consider Your Vendors and External Partners
Often, providers of services to advisors are viewed as leeches rather than partners, but in reality, it can be a mutually beneficial arrangement. The most common partner for advisors is their custodian or broker-dealer.
To what extent should partners be brought into the discussion around your contemplated retirement and the need to prepare for an orderly succession? Should they have the opportunity to participate in finding a suitable successor? How will your departure from the business affect this relationship and is there anything you can do to help ensure they will continue to have an opportunity to serve the business no matter how and to whom the business is transferred?
An even bigger question is whether the new owner will be acceptable to your broker-dealer or custodian. If for no other reason, giving your external partner an opportunity to vet your successor in some way will help to ensure an orderly transition and minimize the disruption to the business.
Consider Your Community
There are multiple ways to define your community. In the context of business succession, your immediate community includes your family. It also encompasses where you work or reside, and the institutions and individuals who have come to depend on you over the years. For economic, philanthropic and leadership reasons, communities need business owners in order to thrive.
When Lehman Brothers collapsed, millions of dollars in contributions to charities, like one that helped inner-city women get college scholarships, totally evaporated. On a personal level, when advisors do not do what’s required to build transferable value and ensure an orderly transition, their beneficiaries—especially their spouses—lose out on thousands of dollars that could have meant financial independence or at least contentment through their own retirement years.
The point of this exercise is not to lay guilt on advisors who are consumed by the multiple they could get for the sale of the practice—but to demonstrate that a properly developed succession plan should at least consider how those on whom the advisor has relied for support during his or her career will be impacted as the end of that career draws near.