More On Tax Planningfrom The Advisor's Professional Library
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Succession planning, like one’s mortality, is something advisors are often reluctant to think about.
But just as your clients need to get their affairs in order in case untimely but far-reaching events affect the lives of their loved ones, so too must advisors have a succession plan in place — for solid business reasons in addition to mere contingency planning.
That message was brought home, poignantly, by Michelle Barbiere of Placemark Investments, who told an audience of investment advisors at the MarketCounsel conference how an advisor she worked with a decade ago suddenly contracted West Nile virus.
Speaking at a wide-ranging session devoted to succession planning, Barbiere said the advisor — in the prime of life, with a wife and young children — was put into an induced coma. When the 43-year-old came out, he was paralyzed. Other practitioners at the firm were, fortunately in this case, in place to make decisions and serve clients during this period. Unfortunately, the advisor died shortly thereafter.
In the ensuing period, the lack of clear planning made sale of the business a challenge. The moral of Barbiere’s story was that advisors need to plan for all eventualities not only for their clients but for their business: Sole practitioners particularly must put in place and test mundane matters such as billing authorization and check-writing authorization.
But there are other surprising lessons that emerged from the panel discussion at the Las Vegas conference.
One is that a business involved with investing a person’s life savings is not likely to experience significant growth absent an understanding that the business itself has a future beyond the life of the practitioner.
That point was brought home by Greg Friedman of Private Ocean, the firm which resulted from a merger of two predecessor firms, Friedman & Associates and Salient Wealth Management.
Friedman expressed surprise that the dazzling boutique they thought they put together wasn’t getting referrals, even from their best clients, for two years after the merger.
“‘We don’t know what we’re referring people into,’ clients would say. “‘We want to see what’s going to be. Are you staying?’”
It wasn’t before the third year that those doubts dissipated and the referrals started coming in.
While getting on that organic growth trajectory may sound appealing — Private Ocean just passed $850 million in assets under management and brings in $7 million in annual revenue — Friedman did not romanticize advisory practice mergers.
“It was the hardest thing we’ve done in our lives,” Friedman said, adding that the consultant advisors most “need to help you on this is a therapist or psychiatrist.”
Waxing poetic, Friedman told the assembled advisors that “your business is like a tree and all those leaves represent clients. Leaves have various strengths [as to] how tightly they’re attached. A merger is like taking the bottom of the tree and shaking it,” he said, while violently shaking his hands to underscore the point.
Other difficulties included profitability, deal structure and turnover.
“It takes longer [to be profitable] than anything you think it’s gonna take,” he said; it took three years in his case.
Another panelist, David McKinley of McKinley Carter Wealth Services, supported that point, saying that owners must be prepared to financially backstop the firm and its employees through the inevitable downturns that will ensue. “I remember pumping cash into the business,” McKinley recalled.
As for turnover, employees replacements reached the 60% level for Friedman in the early stages, resulting mainly from cultural differences between the merged firms, he said.
But those cultural differences turned out to be significant in other ways which, with perfect hindsight, Friedman says he would have reflected in how they structured the deal, had he to do it all over again.
Friedman’s firm was “built for financial planning,” while Salient was oriented toward beating the markets.
That chasm was not initially obvious to Friedman, since Salient had CFPs on staff, but in the culture of that firm, planning was available to those who requested it, rather than being of the essence as it was for Friedman & Associates.
Friedman’s initial reaction was the merger would therefore be a huge opportunity to raise the service model. In fact, however, Salient clients were unimpressed. “‘You’re spending all your time [in planning]; you’re not making the stock market go up faster’” was the attitude he described.
Friedman’s advice to advisors contemplating a merger:
“I wouldn’t merge without surveying their clients…I would have had some metrics in there that would protect me. I would have reflected it back in the deal structure” if he could do it over, he said.
While Friedman was frank about some of the difficulties involved in merging firms, he said he’d never seek to dissuade an advisor from a merger or other succession plan. But he was emphatic that it is so complex that “we are [just] scratching the surface.”
He (and the other panelists) invited advisors in the audience to contact him and ask about what it all entails.
But he closed with a pertinent tip: Citing the 80-20 rule, he advised that rather than spend 80% of your time on deal structure, “I’d spend 80% taking out your spouse to see if you could live with this.”
Greg Friedman regularly contributes commentary to ThinkAdvisor. For more on advisor M&A, see his blog, Solving Succession Planning Via M&A: Getting Started.
To view his latest blog, see Overcoming RIAs’ Top 4 Business Hurdles: Managing Technology
View his six-part series of blogs on succession planning.