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The Conversation: How Young Advisors Can Spur Owners to Succession Planning

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Over the years, my longtime friend Eric Hehman, CEO of Austin Asset in Austin, Texas, has publicly talked at conferences and to me about his experience becoming a partner and CEO at his firm.

He has talked about how he and his firm’s founder, John Henry McDonald, worked together to make the transition from a startup firm to an ongoing business. It’s such an important issue—and he had such an important perspective—that I convinced him to let me share his story. It’s one that I feel a lot of owner-advisors and future partners could truly benefit from.

He and McDonald grew their firm from $25 million in client AUM in 1997, when Hehman started as an intern, to $540 million in AUM ($4 million in revenue) today. But all you younger advisors who hope to run your own firm someday, take note: It wouldn’t have happened without Hehman taking the initiative.

“John Henry never came to me and asked: ‘Do you want to be an owner?’” Hehman told me. “You have to be a catalyst, to make a case that lays out what you see. We had an interactive discussion about why he needed to sell shares and build a management team. He was brave enough, and I did research to build a case and walk him through what I saw so that we could find solutions together. John Henry was amazing in his ability to separate who he was in the business and what he wanted the business to be.”

Most advisors who start up independent advisory firms aren’t entrepreneurs, at least not in the usual sense. They don’t have a particularly unique business idea that they built a business around like Bill Gates, Steve Jobs, Jeff Bezos or Mark Zuckerburg. (Maybe the guys who launched the first independent financial planning firms back in the ‘70s, or the first fee-only firms in the ‘80s, but that was a long time ago.)

Today, most owner-advisors launched their firms using well-established business and service models, taking on the challenges of a startup because they wanted to take care of their clients their own way. Consequently, most of today’s business management wisdom doesn’t really apply to independent advisory firms, with one major exception: the changing roles of firm founders and advisors who were hired as the firm grew. In our experience, failure to understand the evolution of the founder’s role in advisory firms is the single biggest stumbling block to building ongoing businesses that have real market value.

To understand how the roles of a founding advisor and the other advisors change over time, we like to talk about their relative importance to the business. In a startup firm, the person who brings in the clients, which is almost always the founding advisor, is most important—there isn’t a business without client revenue to fund it. Over time, providing a consistently high level of service to keep the clients it has taken years to attract becomes more important. What’s more, the way new clients are attracted changes too, from prospecting to referrals from existing clients. The stature of the firm becomes a powerful marketing tool as well, especially when a firm’s advisors maintain a visible presence.

The result of this shift is that managing the growing business effectively and efficiently gradually becomes more important—to client service, to the bottom line and to growing the business—than attracting new clients. More often than not, a founding advisor’s skill set and inclinations won’t be well-suited to these new challenges. The issue facing the advisory industry is how to make this transition from firm founder to others who are more suited to taking advisory firms to the next levels of growth.

Hehman said this is called “Founder’s Syndrome.” He did a lot of research about it before he had “the talk” with McDonald. “I realized that at first, I didn’t have much to offer and he had everything,” he told me. “But pretty soon, connecting the management dots became a much larger piece of the business, and then we had to decide where the business was going to go.”

In fact, research and the use of outside experts turned out to be the key to Hehman’s ability to get his firm owner to listen to his ideas: “The founder mentality is not to change course. They only address things because they have to. What happens is that firms get to that fork in the road where they have to decide to grow or stay small. Then you have to present your plan, based on others’ ideas in addition to your own. You can craft a story about why the owner would want to let go. There has to be a real reason for them to want to do that. The answer is that they can have a smaller piece of a much bigger pie.”

For Hehman, the use of outside experts started in 2004 when the business had grown large enough that he realized he needed to know more about human resources. He turned to an HR consultant. “He had great experience, had been at Fortune 500 companies and consulted with some, too,” he said. “The consultant and I decided we needed an employee survey. Like any founder, John Henry didn’t want one. He didn’t want anyone to tell him how to run his business. But with the consultant’s help, we convinced him to do it, and we learned a lot that helped us make the firm better.”

That experience enabled Hehman to convince McDonald to use other consultants, including management consultants and a personal business consultant, and even to set up an advisory counsel of outside business leaders. “It was the first time we got an honest assessment of the business from people who knew business. We got things for both of us to work on, project to project for four years. By that time we didn’t need the HR consultant anymore,” said Hehman. “John Henry was a bigger believer in consultants than I was.”

Initiated by Hehman, the use of consultants enabled him and McDonald to work together to create a better business. “We learned together,” he said. “Neither one of us knew it. He had been running the firm for 17 years. I started working there for free. We both were figuring it out together. He taught me things about running a business. My role was to make things uncomfortable so we could make progress, reminding him that it’s not about you, it’s about where you want to take the business.”

A crucial part of their work with consultants and each other was an ongoing, interactive discussion about why McDonald needed to sell shares and build a management team. “He was an incredibly willing participant in this,” Hehman said. “I didn’t want him to feel like I was alone running his business, that all of his eggs were in my basket. So we created a system to professionally develop other people in the firm to be managers and owners, who would help me grow the firm, which would be of more value to him later.”

The transition structure they worked out called for McDonald to sell 69% of the firm to Hehman and other partners—Greg Van Wyk, who oversees their planning division, and Jonathan Davison, who oversees the portfolio/client service division—over 10 years using five-year notes for each increment. “It’s a long process,” he admitted. “I’m four months away from paying off my percent.” Hehman noted it was important that McDonald negotiated a materially lower than market value to transfer the business, and then let Hehman and the others buy ownership over time at today’s valuation. “The juniors need to feel that it’s a good deal, to get excited about growing the business,” he said, “rather than knowing that if they do a good job, the next purchase will cost them more.”

In my opinion, Eric Hehman is one of few role models for future partners across the industry. By taking the initiative to start the conversation, realizing he had a lot to learn and surrounding himself with experts, he started a process that grew his firm more than 10 times larger and created a succession for his owner-advisor to retire and his co-workers to share in his firm’s success. “The successor generation can play the role that a planner does with clients by having the life stage conversation with the firm owner,” he told me. “Do it by writing a strategic plan. If you don’t, someone else will. If the founder doesn’t want to hear that, you’ve heard all you need to know—the founder doesn’t value your opinion. Your purpose in life isn’t just to make the founder’s life better. It is also to create your own voice.”