Live Oak is killing two birds -- succession planning and retaining young advisors -- with one stone. (Photo: Kevin Garrett)

Darrell Reese and Paul Kink first met each other about a year ago at a Raymond James corporate event where, in casual conversation, it transpired that Kink was looking to sell his Hamilton, Montana-based practice.

The 73-year-old advisor’s dedication to his 250-client firm, his keen desire to find the right successor for his practice and his love for the pristine beauty of the Montana landscape quickly convinced Reese, 50, that he should buy the practice. “And so,” Reese recalled, “after getting to know Paul, I asked that he consider me as his successor.”

The deal was swift and neat, and not just because both Raymond James advisors, after spending some quality time together, were increasingly convinced that their initial vibe was the right one and that their approaches were completely aligned. It happened because Reese was able to secure the funds he needed to seal the transaction from Wilmington, North Carolina-based Live Oak bank, and pay Kink in full at market value.

“Paul is in his 70s; he doesn’t have time to wait for a 10-year payout, and he needed to sell to someone who could finance the entire deal,” Reese said. “Many people are in the same boat now. So having Live Oak, which is head and shoulders above every other lender, was key to this deal.”

Live Oak, he said, was not only integral to the successful purchase of Kink’s practice, but its presence in the advisory space is helping the industry contend with one of the biggest impediments to succession planning: a lack of proper financing alternatives.

“When you’re selling your practice, you have to make sure a potential buyer has the financing they need, particularly when you’re my age and you can’t afford to say ‘Okay, you can pay me out over the next however many years,’” Kink said.

With so many owner-advisors across the nation now well into their 60s, there really is no debate about the urgency of succession planning. However, one reason why so many advisors are balking at building actual succession plans is because “the industry has found it very challenging to get the right kind of loans, and it lacks liquidity,” said David DeVoe, managing partner and founder of DeVoe & Company, which consults with wealth management firms, particularly on mergers and acquisitions.

Even if advisors nearing or at traditional retirement age have formulated succession plans, it’s often impossible for younger advisors to think of buying their practices because they lack the funds.

In the eight-plus years he served as managing director of strategic business development at Charles Schwab Advisor Services, DeVoe approached several banks to convince them of the merits of engaging with and lending to financial advisors. “I had mixed results at best,” he said, “because for a lot of banks, cash flow lending just isn’t an ideal business line. Now, we see new players like Live Oak coming in and creating value by enabling firms to get these transactions done, by making it easier for junior people to buy practices and by allowing selling partners to exit without any financial burden.”

A Dedicated Vertical

Live Oak made its first loan in the investment advisory space in February 2013 and is now close to eclipsing $250 million in loans to advisors alone. In total, the bank has lent $1.1 billion to a range of small business niches.

“We do a tremendous amount of analysis on industries where we’re thinking of putting our laser focus on and that we think are underserved, and the investment advisory industry certainly was,” said Jason Carroll, managing director and senior loan officer for investment advisory lending at Live Oak. “There was no other bank lending platform to the industry at the time; there was no formal FDIC-insured bank. [That], coupled with the aging demographic of advisors approaching retirement age, is why we came in.”

Live Oak hires professionals who have expertise in the different industries to which it makes loans. “Our team is an investment advisory team only and is only making investment advisory loans day in and day out,” Carroll stressed. “No one on our team makes commissions; no one on our team works in any other verticals.”

The bank can lend up to 100% in financing to an advisor looking to buy a practice, but loans typically tend to be in the 25% to 75% range, he said. “That range is pretty much dictated by the involvement the buyer has had in the business, their role and how long they have been there.”

That Live Oak provides the type of small business loans common for brick-and-mortar enterprises is important for investment advisors. The longer-term, low-interest loans guaranteed by the United States Small Business Administration (SBA) are extremely helpful for an industry that faces a liquidity challenge, particularly when it comes to buying and selling independent practices. Those types of loans, along with the bank’s expertise in the financial advisory space, is one of the reasons why Raymond James chose Live Oak as a preferred provider of financing for acquisition and succession planning deals.

While Raymond James does provide acquisition financing to its advisors, Live Oak offers larger loans with longer repayment periods, said Brock Guice, senior vice president for finance at Raymond James Financial Services (RJFS). “We often suggest that advisors consider Live Oak,” Guice said.

“We look at Live Oak as another arrow in our quiver,” said Nate Lenz, director of practice acquisitions and a specialist in the succession planning and acquisitions group within RJFS. “Thus far, we have done 20 transactions with Live Oak.”

According to Ted Parker, general manager of Live Oak’s investment advisory team, specialized lending to the investment advisory space has helped ease some of the burden succession planning poses by transforming the capital structure of buyout deals. Thus far, the 30-70-5 structure — with a buyer putting down 30% in cash and a seller carrying 70% of the value of the deal over five years — has prevailed in the buying and selling of financial advisory practices. Parker said, “Our financing has created liquidity in the market, enabling a selling advisor to monetize value in what they have created and empowering junior advisors to buy into a familiar situation.”

Because of the more affordable financing, passing the baton from first-generation to second-generation advisors is much more seamless, Parker said, and it appeals to both employees of a practice as well as clients.

Fifteen months ago, Live Oak contracted with a research firm for a survey on succession planning, with 43% of the responding advisors stating that they would accelerate their succession plans if they were aware of available financing alternatives.

“We have to create awareness where there has been a dearth of attractive financing, so we are committed to education and outreach as well,” Parker said. “We believe there’s a huge market of pent-up demand, and we think that if we can increase awareness of the flexible and attractive financing options for next-generation advisors to buy into their firms, we would see a move toward more internal successions.”

Succession Planning Lag

But even with a dedicated lending bank like Live Oak now in the picture, most advisors are still not giving succession planning its full due.

According to DeVoe, only 25% of the advisory force currently has a written succession plan in place; given the age of the average advisor, “that is kind of disconcerting.”

It takes time and effort to launch a firm and grow it over the years, and a good succession plan is time consuming as well. It also implies the dreaded inevitable, DeVoe said, the kind of finality that advisors, like most human beings, don’t want to think about.

“When you’re putting a succession plan in place, you’re examining an event that will create a lot of change in life,” he said. “People don’t generally like change, and for an advisor, a succession plan means his own retirement, his own mortality.”

A Process, Not an Event

Raymond James urges its advisors to begin putting succession plans — catastrophic and long-term — in place from day one.

As soon as an advisor opens an independent branch with Raymond James, “we work with them to put a catastrophic succession plan in place as soon as they have transitioned their book of business,” Guice said. “If an unforeseen event should occur, a written agreement will allow the successor to compensate the advisor or estate for the practice on a continuing commission basis while providing a plan to ensure that the staff and clients are in good hands.”

Succession planning, Lenz said, should be viewed as a process rather than an event.

“Our advisors spend years building their businesses, which represent a significant personal asset,” he said. “As business owners, providing continuity for clients and staff and ensuring that their beneficiaries can realize the value of this asset in the event of a catastrophe is paramount. When discussing long-term succession planning, we push to get our advisors to understand and evaluate their liquidity needs, the needs of their staff and their ideal transaction timeline in order to determine which succession model is right for them.” Once that occurs, Lenz said his group’s job is to provide “tactical support through all phases of the process, whether they are seeking to develop a successor internally, seek out merger opportunities or enter into an outright sale.”

Who’s Following in Your Footsteps?

For Greg Friedman, president and co-founder of the San Rafael, California-based wealth management firm Private Ocean, the ultimate success of a succession plan hinges on the successor.

Failure to choose the right successor, he said, can run a healthy practice into the ground.

“If you want someone from within your firm to succeed you, you want to know early on whether you have the right talent, the right people,” he said.

The founding generation of advisors are entrepreneurial by definition, but they tend to hire people who may lack the skills that will ensure the firm’s future success. The challenge lies, Friedman said, in grooming a designated successor from within the firm “to become you,” and this is where many businesses can run into trouble.

“When I hire my successor, it most likely won’t be someone we hired years ago as an advisor. I would go out and choose a CEO who wants to run a large firm entrepreneurially and support the staff to grow this business,” Friedman said. “That’s a very different skill set.”

An entrepreneurial spirit is even more important today when demographics are changing so rapidly and wealth is being created in new and unexpected quarters. Understanding these societal changes is important to capturing new client bases, to making sure an advisory practice stays current and to enabling that practice to stay on top of whatever comes next.

To the extent that innovation and change can drive growth, they are important for lenders like Live Oak as well, since it’s a growing business — on both the top and bottom lines — that can easily make the payments on that loan.

The Perils of Procrastination

Both anecdotal evidence and formal studies show that the vast majority of financial advisors have an informal succession plan at best, which consists of a loose agreement with people in their firms or with like-minded colleagues, said Friedman. Without something formal and binding in place, though, the odds of even that informal plan coming to fruition are very low.

Waiting until they’re knocking on 60, as many advisors seem to do, is pointless, Friedman said, because it’s “at least 10 years too late” to create good succession options and ensure a positive outcome for the practice. That’s why not addressing succession planning properly can seriously threaten an advisor’s practice, alienate both clients and employees, and jeopardize the future of the advisor’s family, too, he said.

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