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Next in Line

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There are some conversations that are just not destined to go well from the start: “Well, honey, the good news is that I did get to ride in a squad car …”

“Of course we have car insurance, son. Why do you ask?”

“No, dear, I didn’t say it made you look fat, exactly…”

As a financial planner, you probably have experience with awkward conversations, whether it’s confronting clients who splurge more than they save, mediating between divorcing spouses, or refereeing adult children wrangling over a parent’s estate. Yet some topics make even the most stalwart planners quake in their boots. Like succession planning.

Broaching the subject isn’t so bad when you’re talking to clients; they’re paying you to bring up things like this, even when it means discussing gloomy stuff like, well, death. But let’s say you’re an associate in a firm with a single principal, and you want to talk with him about his succession plan–in fact, you want to be his succession plan. He seems to have no plans to retire, so what you really are asking about is the future of the firm after he’s played through to the Great Golf Course in the Sky. How do you bring this up? And should you even bring it up? After all, it’s not exactly the height of professional etiquette to waltz into your boss’s office and announce brightly, “So, when you kick the bucket, I’d like to have your corner office, your clients, and everything in this building. Is that going to be a problem? By the way, how’s your health?”

Planner Karen McIntyre is about as friendly and considerate as they come, yet she thinks there’s nothing wrong with initiating this conversation–albeit in a much more tactful way. In fact, she’s already done it herself.

It helped, of course, that McIntyre and the principal of the firm that employs her had already worked together for more than a decade. It also helped that they’ve built a strong professional relationship that allows them to speak freely and honestly. Still, as a former psychology major, McIntyre, 39, thought carefully about how she wanted to approach her boss, Terry Siman, the sole principal of Executive Financial Services, Inc., a fee-only firm in Spring House, Pennsylvania. She was mindful to broach the subject in a diplomatic, non-threatening way, and she emphasized how her plan could benefit not only her, but Siman, the firm, and his clients.

“I had an open conversation with him, and basically said, ‘I want to stay around. What are your plans?’” says McIntyre. “I wanted him to know that I’m here for the duration, and that that’s valuable to him and valuable to me.”

At first, Siman was “a bit taken aback,” she says, “because no one had ever asked him that before.” But after the initial shock, the interview turned into “a very comfortable, very supportive conversation,” she notes. “We’d had a little bit of [staff] turnover, and I think he was pleased to know that this is where I want to be, and I don’t have any plans or expectations to do anything but continue to work here.”

It turned out that Siman hadn’t made provisions for the continuation of the firm in the event of his retirement or death; he’d purchased life insurance that would replace the equity in the firm in the event of his death, and he’d prepared a letter that would be sent to clients to thank them for their years of patronage and assure them that the staff could help them transfer their accounts to other firms in the area. McIntyre didn’t want things to happen that way, and she said so–diplomatically, of course. “I said, ‘I want to have some equity, some interest, in the future of the firm,’” she recalls. “‘How do we make that happen?’”

Why Now?

Given McIntyre’s concerns, you might think Siman is an tottering old codger, but he’s a healthy, robust 51–a mere 12 years older than McIntyre herself. His untimely demise hardly seems imminent, and, for that matter, neither does his retirement. “He’s not going to retire tomorrow, and I don’t even think he’ll ever completely retire,” says McIntyre. “I think he enjoys the flexibility of traveling and playing golf as much as he wants to, but he also likes to have his hands in the thick of things. He’s an active daily participant in the business.” The two advisors are weighing succession arrangements not because they expect to implement them right away, but because “we’re planners–planning is what we do,” says McIntyre. “We want to have this in place so that whenever we need it down the road, it’s there.”

So it wasn’t Siman’s age that prompted McIntyre’s concerns; instead, it was September 11, 2001. “9/11 really got me thinking about the need for succession planning. I started thinking, ‘Gosh, what if something happens [to Siman]? I don’t want to go out and start over again,’” she says. “‘I love my clients! They’re my family. I don’t want to lose them.’”

It didn’t take much to convince Siman that McIntyre should become part of his succession plan; she was smart, qualified, experienced, and had similar ideas about how to run a firm. The harder part was “How do we make this happen?”

Group Effort

The first step was to take the emphasis off the founder of the firm, and make sure clients knew that Executive Financial Services was made up of not one, but four, competent, experienced planners who could assist them with their needs. One easy way to start the process was to change how everyone answered the phone. Instead of saying “Terry Siman’s office” as they had previously, the planners and four support staff members were instructed to say the name of the firm, “Executive Financial Services,” and then identify themselves.

In addition, each client was assigned a professional staff member as a primary contact. “Previously, Siman was the primary contact, and the rest of us supported his efforts. Now we [the professional staff] are the primary contacts, and the administrative people support our efforts,” says McIntyre. Clients are better served by the new structure, she says, because multiple staff members can help any given client.

Surprisingly, most clients were fairly mellow about the changes. “We presented it as a method to serve them better. We wanted them to know that we’re all of a professional caliber, and we’re all capable and qualified … but we also made sure they knew that everyone in the firm, including Terry, was available to them,” she says. Nobody had to go “cold turkey”; it was more a matter of gentle nudging. If a client assigned to McIntyre called and asked for Siman, for instance, the receptionist would say, “Is there something that Karen can help you with?” “Little by little, they started to realize, ‘Okay, I should be asking for Karen,’” says McIntyre. In an effort to delegate work, the firm has also taken this strategy a step further. If a client calls asking for a professional staff member, the support staff member will often say, “Is there something I can help you with?” “It may be that they need a check, or have an account to transfer in, so the administrative staff can help them with that,” says McIntyre. “It makes us all more efficient.”

Interestingly, in a recent survey where the firm’s clients were asked to identify their assigned associate, some clients listed their assigned planner, while others listed their assigned planner as well as Siman. The answers seem to vary based on how long the associate had been with the firm. “Since I’ve been here 10 years, more of my clients said that I was their only planner,” notes McIntyre.

Terms of the Deal

Now, you’re probably wondering: If there are three planners at the firm in addition to Siman, why is only one of them getting fitted to fill the founder’s shoes someday? Are the other two huddling in the break room, scowling about being left out of the loop?

Actually, they’re not. “One is fairly young, and is interested in increasing his current earnings more than investing in the business,” says McIntyre. “When you’re 30 years old, it’s kind of hard to know what you want to do with the rest of your life.” And the other is a relative newcomer to the firm, and isn’t yet comfortable making such a long-term commitment.

Yet even without associates’ competing egos or goals to deal with, Siman and McIntyre still have their hands full in figuring out how to structure the succession plan.

When it comes to priorities, Siman’s primary goal is to keep it simple: no complex structures or formulas. He also favors receiving a gradually diminishing income stream as he phases out of the business. “He doesn’t want his income to be reduced suddenly to nothing,” says McIntyre.

McIntyre’s top priority, by contrast, is to make sure that the firm still has value after Siman is out of the picture, or indeed even as he is receding from the picture. No one wants to pay full price for a 100-client firm only to have it morph into a 50-client firm three days after purchase. “I don’t want clients to leave and then have to worry about how to pay for the purchase of the firm,” she says.

Fortunately, their priorities–Siman’s wish for a gradually decreasing income stream and McIntyre’s concerns about client retention–are both accomplished by a plan in which Siman phases out of the firm over time, rather than riding off into the sunset on his golf cart and never looking back. “My feeling is that purchasing equity over time, with Terry moving into an ‘of counsel’ role–where clients know he is still involved to some degree–is in my best interest, and fits well with his needs, too,” says McIntyre.

Still, there are other issues. For instance, how will the value of the firm be determined? How will McIntyre pay for the firm? Over what time period will she pay for it? How long will Siman’s “phasing-out” period last? The two planners are still ironing out these details. To place a price tag on the firm, they’re considering valuing it based on a multiple of annual net income. Another option is for McIntyre to “buy” a certain number of clients each year over a period of time. “Let’s say I wanted to buy 10 clients and their total fees for one year were $100,000,” she says. “I would then pay one year’s worth of fees–$100,000–over a five- or ten-year period.” Incidentally, they have opted not to consult an outside valuation firm. “We’re both financially savvy, and I think having an internal buyout is very different from marketing the firm to the public,” she says. “It allows you a broader range of alternatives.”

As far as how McIntyre will pay for the firm, the planners considered establishing an employee stock purchase plan, “but that was a little too complex for us, frankly,” she says with a laugh, adding that it would probably be more appropriate for a larger firm where there would be more employees participating in the ESPP. Other alternatives include purchasing shares of the firm with part of her salary or cash, or, if the firm establishes a program in which planners earn bonuses for bringing in new business, funding the buyout with that additional compensation. Though no arrangements have been finalized, “I would say that purchasing equity via bonuses and part of my salary is probably most attractive to me,” she says.

At present, none of the planners receive compensation for bringing in new business, but that may change once they take on more marketing responsibilities, says McIntyre. “Up to this point, the principal has had sole responsibility for new business generation, but we decided to change that,” she says. “It’s still a work in progress, though–we’ve not yet identified how to structure that program.” They’ll also have to decide how, or if, to change the company’s fee-sharing arrangement with a local accounting firm; a portion of fees from clients referred to the accounting firm is currently sent to the firm, not one specific planner.

It can be hard for business owners to consider what will happen to their firms after they’re no longer a part of them; it can also be hard to be the one to bring up the subject. The results, however, are worth it: the owner or his family receives compensation for his years of work, his long-time clients are assured continued service by someone he trusts, and the principal-on-deck has tangible reasons to invest time and energy in the success of the firm right away. It may be an awkward conversation–but hey, at least it’s not as bad as, “Hello, honey? You know, I never thought I looked good in stripes, but these prison uniforms aren’t half bad…”