From the July 2011 issue of Investment Advisor • Subscribe!

July 1, 2011

Finding Success in Succession Planning

Whether you’re affiliated with a broker-dealer or completely independent as an RIA, proper succession planning helps you realize value long before you walk out the door. Two top firms explain how

The statistics are depressingly familiar. Tiburon Strategic Advisors finds half of advisors over the age of 50 intend to sell their businesses upon retirement. While you might be wondering what the other half plan on doing, consider that only 29% of independent advisors have written succession plans.

It isn’t as if the advisor profession is without prospects. Employment in the field is expected to grow “much faster than the average for all occupations,” according to the Bureau of Labor Statistics. For the 10-year period between 2008 and 2018, the advisor profession is projected to grow by 30% as more baby boomers retire. What many advisors have spent a lifetime building clearly has value, and a defined exit strategy is the best (and usually only) method for ensuring its proper extraction.

Yet when it comes to succession planning, the cobbler’s children have no shoes. Kim Nourie of San Antonio-based Cross Financial Services would be the first to say statistics rarely motivate people to act. Personal experience, of the kind Nourie recently experienced, will light the proverbial fire much quicker—provided it isn’t too late.

“About a year after I joined my father’s firm, he was diagnosed with kidney cancer,” she says. “We had a very positive outcome, but it taught us how fast things can happen.”

Advisors are aging, boomers are retiring and more independent broker-dealers and RIAs are stepping up to help retain value, as well as client confidence, in their affiliated firms.

The level of support the advisor receives, of course, depends on the size of the organization, whether it be an independent broker-dealer or a large registered investment advisory firm.

Two organizations in particular, Scottsdale, Ariz.-based United Planners Financial Services and Aspiriant, a California-based RIA, stand out in their respective channels when assisting advisors in the development of a plan. A review of what each firm offers is a benchmark for other advisors involved in the succession planning process.

Service and Support
Kim Nourie, United Brokers“My father and I had always talked about partnering up in the business,” Nourie, (left), says. “I’d been in corporate America and throughout my career we would periodically talk. Eventually he said, ‘You would just love this business.’ So I came on board.”

Nourie’s father was already with United Planners and was, for the most part, a sole practitioner. About a year after she joined, she says, it became apparent she was his succession plan.

“From day one we would meet with clients and they were thrilled,” she reveals. “So many of them said to my father, ‘We always wondered if something happened to you, what would happen to our account; who would take care of us?’ We realized early on that clients were thinking about it, even if they weren’t saying they were thinking about it. If we asked our clients to plan, we needed to show them that we plan as well.”

The epiphany led Nourie to the next logical step; what if something was to now happen to her? Her father was in a phase of his career where it would be difficult to step back in. So she made use of what any smart advisor should in a similar situation: her broker-dealer and professional networks. Through her local chapter of the FPA, she met her “new succession plan.” Her partner, Kirk Francis, had his own book of business and a small practice. He, too, had been thinking of his succession plan, and they spent over a year talking about teaming up to start a larger practice.

“In addition to a succession plan, we really wanted to work together to utilize the strengths and weaknesses that each of us has in order to build a better practice, always with the manner in which we treat our client as the end in mind,” she says.

But as anyone who’s done it knows, joining forces isn’t easy—and at times awkward. Nourie says the start of discussions meant they had to open up and be honest; profit and loss statements, revenue and expenses, all were on the table. They went line by line through each other’s books and examined where each spent money. After a year, they felt good about each other as people, she says, with similar values, goals and objectives for their clients.

“When you affiliate with United Planners, you typically become a limited partner,” she explains. “We spoke with them about lessons learned from other advisors throughout the company in our same situation. We wanted to understand the best methods for making the business flow in the way we wanted. They were very willing to take the time to sit down and help ease us through it.”

[Read more about broker-dealers' thoughts on succession planning.]

Recognizing that advisors have different needs and experiences, United Planners currently offers three levels of involvement when assisting in succession planning—platinum, gold and silver.

“The silver level makes heavy use of our internal intranet,” states Sheila Cuffari-Agasi, the firm’s vice president of partner development. “There are three sections on our Connectup platform dedicated to the subject and all are distinctly different. You can find information on straight succession planning or selling your practice, on buying a practice or on building out your branch location with key people.”

Advisors fill out what Cuffari-Agasi calls an intake form, which gleans information on advisors’ needs, personality and what they are looking to accomplish. The platform also makes use of Google Maps and related technology to study geographic locations for potential buyers and sellers.

“There is no cost associated with this level,” she says. “Since we’re structured as a limited partnership, we knew it would be unfair to ask all our reps to share in the expense of developing one, comprehensive succession planning platform. Some might not be interested and others might be younger and not focused on that aspect of the business quite yet. At the same time, we knew we had to take advantage of internal buy, sell and succession opportunities. So striking that balance is the reason for the tiered platform.”

The gold level employs a database and personnel to assist with customized marketing, and the broker-dealer coaches the advisor on locating and contacting qualified contacts. The associated cost is the offset from the printing and mailing of marketing material, as well as for e-blasts and other electronic media.

The platinum level involves cold calling, lead generation and appointment-setting with qualified candidates. Although a cost is involved, it does include a guarantee of a certain number of appointments.

Nourie, for her part, is now three years into her partnership, and it’s an understatement to say they’ve built on the succession planning she originally began with her father.

“He’s in his seventies and semi-retired,” she says. “[My partner] is in his late-fifties; I’m in my late forties; we have someone who just turned 40 and we have a new associate in his 30s. Our vision is to make sure we have the decades covered. We’ve found [the age spread] to be very helpful as we look into technology or how different generations receive information. Some people look for a succession plan with someone who does business precisely in the same way. But in taking advantage of people’s individual strengths, weaknesses and skill sets, the synergies become great.”

Without a Net
Like Nourie, Aspiriant CEO Rob Francais says the RIA’s succession planning policy was born of necessity. The firm, with 42 owners and 120 employees, has a structured policy in place for associates to achieve equity and security, but it wasn’t always the case.

“It started at a predecessor firm, of which I was also the CEO,” he says. “Of my three other partners, two were 15 years older than I. It was really clear we needed to plan for succession.”

More importantly, he notes, the need was born out of what affluent families want from an organization: an objective environment, superior solutions, continuity of advice and fair pricing. Especially with generational planning, these clients need a firm that’s not only independent, but one that’s durable.

“AsRob Francais, Aspiriant an organization we try to reconcile the interests of affluent families and the interests of talented advisors,” Francais, (left), adds. “On one side you look at what families want. On the other side you look at what talented advisors want and try to build an organization that crosses over both, and succession planning is a critical component.”

In order to have a successful succession plan in the RIA space, the firm has to have the appropriate core values, governing structure and compensation plan. In other words, succession planning has to be a part of the core values, governing and compensation structure of the firm. The first issue is in making people understand the pathway to ownership, Francais says. Once a potential candidate for ownership is identified, management then proposes an ownership stake. Shares are sold from an inventory purchased by the organization from a retiring partner. The ownership candidate would purchase those shares for a specified valuation in the buy-sell agreement.

“It’s a free market system,” he observes. “It’s a closed market in a sense that you can only buy and sell among owners. People are allowed to put their shares up for sale once a year. But, so far, our model has worked. It’s successfully gone through a pretty severe downturn, a management transition and a merger and acquisition.”

When asked if changes were made in response to any of the aforementioned events, Francais says the firm keeps an inventory of technical corrections, but it’s not something the firm engages in very often.

“The one thing I would say about succession planning is that if you’re going to ask people to buy into the organization, then you have to increase the formality with which you operate,” he warns. “Governance therefore becomes a very important component. If we’re making fundamental changes, we have to think very seriously about them because people have bought into the organization under a set of rules and expectations. If you change them haphazardly or too often, it pulls at the fabric of the organization.”

If only every advisor had the resources and scale of Aspiriant. For smaller firms that don’t, Francais offers the following advice.

“I would start sooner rather than later; sooner than is comfortable for you,” he says. “And I’d make it equally uncomfortable for your employees to buy into the organization. Founders and owners need to recognize that the value of their organization is dependent upon the very people that support the organization. To share in some of that wealth creation is not only appropriate, but will ultimately reap more value due to the stability it brings. It sounds counterintuitive, but if [owners] really want to optimize their value, they should begin sharing it sooner than they would like.”

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