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Friedman’s 3 Realistic Steps to Succession Planning

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I recently attended Dimensional Fund Advisors’ two-day conference on Succession Planning in Santa Monica, Calif. Personally, had I attended a conference like this five years ago, it would have been invaluable to me. The DFA meeting was a phenomenal event nevertheless, and it validated many of my own key points that I’ve shared with advisors who are considering their succession plan:  

  • Start early.
  • Be realistic about valuations.
  • Be ready to actually sell and step aside.

Realistic Succession Planning Step No. 1: Start Early

This may seem obvious and you’ve heard it before. But who has time to stop and think about a succession plan? You do, even if you think you don’t. It’s critical that you make time—now—to start thinking about the fate of your firm, even if you’re planning to be around for another five, 10, or 20 years.  

The sooner you start, the more time you give yourself to evaluate potential buyers and to think about a smooth transition for your clients. Don’t short-change your clients, your staff or yourself by putting off until tomorrow what you can be thinking about today.  

Broker-dealers and custodians have taken the initiative and started thinking for you, offering workshops  and programs (Fidelity Institutional Wealth Services), a practical guidebook for succession planning (Pershing Advisor Solutions) resources (LPL Financial) and even full-fledged  services (Schwab Advisor Transition Services), designed to help you benchmark your firm’s health, goals and exit strategy. And though Schwab reported in its 2011 RIA Benchmarking Study that the number of its RIAs with a clear succession plan was a staggering 60%,  the rest of us seem to be procrastinating.

In a 2012 survey by InvestmentNews, just 7% of 400 advisory firms responded that they have executed a formal succession plan, and only 15% said that they have prepared a plan.

So why aren’t more advisors listening to blog posts like mine (see here my previous posts on the subject) that tell them they need to start early on a carefully-crafted exit strategy? It’s not just a lack of time. Business owners—myself included—will tell you that giving up something that you’ve worked so hard to build from the ground up isn’t a task you can easily ship off to the highest bidder.  That takes me to the next two points: be realistic, and be ready to sell and step aside.

Realistic Succession Planning Step No. 2: Be realistic about valuations

There is this misconception that a number of giant, ultra-successful firms are just waiting to swoop in and buy you out.  Unfortunately, those expectations are always too high.

Yes, there’s a reason you’ve been successful and you do deserve a buyer who understands your philosophy and your work ethic. You’ve nurtured that firm from a handful of clients to a network of families, companies and entities that believe in your work and rely on you to help them manage their money.  But in this industry, especially over the past few years, we’ve placed a price tag on our firms that’s unrealistic.  If you’re a sole owner of a firm holding out for your value to go back to where it was in 2006 or 2007, you’re fighting a losing battle. The environment has changed. Reality has changed.

It’s important to consider the worth of your firm today, not yesterday. If you don’t, you’ll find that you’ll lose talent before you’re able to sell. Those advisors will go elsewhere, to firms who understand the competitive, pull-no-punches environment that we’re faced with today.

Realistic Succession Planning Step No. 3: Be ready to actually sell…and step aside

Especially for sole owners, creating that succession plan means more than mapping out the future of your firm. Selling something that you’ve created can be both exhilarating and terrifying. It’s a life-change, a step into a new direction and the last thing you should be doing is looking back.

If you’re like me, you started in this business because you wanted to help people. That goes beyond crunching numbers; there are deeply personal emotions involved here, including pride—“This is my firm, and no one will be able to take care of my clients like I can!”—and fear—“Now what?”— come to mind.

Planning for succession means planning for your own future. And though it can be hard to let go of the past, we have to accept that the future is inevitable. What you control is how your exit strategy plays out.  Will your clients experience a seamless transition into good hands that offer them all of the services that they expect? Will your staff benefit from this new structure, enjoying a continued culture that you worked so hard to cultivate?

The answer to both of those questions can be yes, but it’s up to you to make that happen.

Just remember to start early.


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