From the February 2013 issue of Investment Advisor • Subscribe!

Growing Your Own Successor

The key to successfully transitioning your practice is to mentor your own qualified successor

Let me tell you a succession story. About five years ago, I did a recruitment for one of my client firms that resulted in two pretty mediocre candidates by conventional standards. Yet I sensed that one of them had an extraordinary drive to become a good advisor, and since we didn’t have a lot of options, I suggested that my client hire him. Just three days later, the firm owner made the assessment that his new advisor couldn’t do the job, and he wanted to fire him: “He doesn’t know how to use Excel. He’s shy in front of people. His financial plans are basic.”

I reminded my owner/advisor that he had made a 90-day commitment to his new employee (the kid had moved from another state), and looking for another advisor would set his plans back at least six months to a year. Once he calmed down a bit, I suggested he not think too long term: We still had seven years or so before we needed to start thinking about succession. Instead, I told him to commit to making the young advisor into a good advisor, which he agreed to do.

Fast forward to two years ago. True to his word, my client had worked diligently to train his new advisor and succeeded at making him a very good advisor and a great firm employee. Now a lead advisor, the “kid” had become more than competent at all phases of financial planning, excelling at portfolio management, working directly with clients, taking initiative and leading the other employees to do their best. Now it was time to focus on a succession plan, and the owner/advisor wanted to hire another advisor to take over the firm.

In his mind, the problem was that his younger advisor didn’t have any business management experience. I pushed back, asking him to consider the advisor he already had. He waffled, and we continued to talk about it for a year. Finally, in one of our discussions, when I once again reminded my client what a good advisor and employee the young advisor had become, he responded, “Sure, but I’ll have to teach him to be an owner.”

I shot back, “Like you had to teach him to be a good advisor?” You could actually see the light bulb go on: He realized that like training a young advisor, training another firm owner was an essential part of his job. After talking with the younger advisor, who happily made the commitment to work hard at learning what he needed to know (just as he had done since he was hired), the owner made the commitment to teach him to be his successor—and I guarantee he will be, in about two or three more years.

Practice transition and succession planning is increasingly on the minds of independent advisors these days, both older and younger. Many older advisors would like to transition the care of their clients to another advisor of their choosing and reap the benefits of the value they’ve created, while many younger advisors would like to own their own firms. Yet, as far as I can see, the advisory profession hasn’t created an effective formula for making these transitions successfully and consistently. In my experience, the solution lies in adapting the business model that’s been successful in other professions to the advisory world, with well-thought out programs that first create great advisors, and then create great business owners. Owner/advisors need to accept that these are essential elements of their jobs: teaching young advisors to be great advisors, then teaching them to be great owners.

One of the current holes in the advisory profession is the lack of an ethos to pass older advisors’ knowledge on to the next generation. Training young professionals is a major part of most professions today: I’m talking about on-the-job training, beyond schools or additional course work. Doctors have an elaborate training system, largely based around hospitals, in which both practicing and staff physicians train interns and residents, with even the more experienced of these doctors training those with less experience. Law and accounting firms work much the same way, with young professionals assigned to teams of older professionals, who serve as mentors, monitoring their work and gauging their progress.

With accounting, law and even medical practices, these training “programs” also serve as succession “plans.” Based on their aptitude, skills and ability to work within their teams, young professionals are advanced up a well-defined ladder, which ultimately results in the opportunity to acquire partnership in their firms, effectively buying out older professionals who are retiring. Currently, very few independent advisory firms have anything that begins to approach a similar succession system, but as they inevitably emerge, they will become the succession plans of our profession, as well.

To help owner/advisors create great firm owners, I’ve developed a four-step process, which is an extension of my P4 program for creating great employees (which I’ve written about extensively in these pages). Before embarking on ownership training, I strongly recommend that advisory firms implement the Four Ps: preparation, pay, perks and performance. Owner/advisors also need to make the commitment to mentor young advisors to the point that they are great senior or lead advisors.

Once that’s accomplished (usually over a three- to five-year period), they can start training their younger advisors to succeed them as a firm owner, following these four steps:

1. Preparing the owner. Owner/advisors need to accept that being an owner is a skill set that can be taught, assuming the student wants to learn and the teacher makes a commitment to teach. Yes, this knowledge can be acquired in a haphazard, trial-and-error manner, as most of today’s owner/advisors have done, but it doesn’t have to be that way. In fact, in my experience, learning directly from someone who’s “been there and done that” is a far better way to learn. Once young advisors have proven themselves (and their relationship with their mentors) by becoming great advisors, the biggest hurdle is convincing owners that their advisor employees have ownership potential. As it turns out, the key to creating a great successor is the willingness of owner/advisors to teach what they know—which is what they should focus on.

2. Training others. The first step in becoming a successful firm owner is the ability and willingness to pass one’s knowledge along to others in the firm. Just as other professions have their professionals start teaching their younger peers within the first few years of their employment, advisors, too, greatly benefit from training co-workers. Not only do they often learn more through the act of teaching, but they greatly increase their leadership skills and understanding of the challenges of managing employees.

3. Management. After younger advisors have achieved competence as advisors and in training other employees of the firm, it’s time to introduce them to how the firm runs as a business. At this point, I encourage my clients to put the advisor on the “management committee” (which may consist only of the owner/advisor and the advisor), which has regular (usually monthly) meetings to discuss the firm’s operating costs, revenue streams, marketing, compliance, IT, and operating and employee issues.

4. Ownership. Finally, future owners are introduced to thinking like owners by offering them minority ownership in the firm, having them assume responsibility for key areas such as compliance or rainmaking, or simply inviting them to partner meetings (usually quarterly or semi-annually). In these meetings, firm profitability and the status of any debt is discussed, and the overall strategy of the business is set and monitored, including long-term goals, marketing initiatives, new client sectors, new client services, and the investment of the firm’s resources in personnel, technology, etc.

By the end of this process, younger advisors have been exposed to every facet of an advisory business, gained experience in one or more management areas, learned how the current owner/advisor approaches managing each, and understand the present status of the firm. If the owner/advisor does his or her job of transferring knowledge and experience, the younger advisor will be a far better successor than anyone else. Unfortunately, most owner/advisors these days merely are trying to “sell” their firms to their employees, rather than create new owners. Only when we start to emulate other professions will independent advisors successfully transition their firms to truly qualified owners.

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