Lots of ‘Noise,’ Not Enough ‘Businesses’ in Advisor Space: FP Transitions’ Grau

Succession, exit, continuity plans and mergers—all the same things, right? Wrong, according to David Grau, president and founder of FP Transitions.

“Not all of you should have a succession plan,” Grau told attendees Thursday at NAPFA’s fall conference in Arlington, Virginia, just outside Washington. “There’s a lot of noise in this industry—a lot of information, and sadly most of it’s wrong.”

Indeed, Grau said it’s important to get the terminology right when talking about the various strategies advisors will use when deciding to leave the business, and he suggested there are too many “books” and “practices” in the independent space and not enough “businesses.”

Grau set out the differences in advisors’ strategies:

• Succession plan—A gradual, incremental transition of ownership, leadership and responsibility from one generation to the next. You need certain tools to create a succession plan; you need an entity that’s stock based.

• Exit plan—Selling when you’re done or buying an entity from somebody. While a succession plan is stock-based, an exit plan is asset based. “An exit plan is not sudden, it is just complete.”

• Continuity plan—It is sudden; it’s designed for death or disability and it is contract based; you sign an agreement.

• Mergers—These are statutory; two or three companies merging into one. “You could have a merger of equals but that doesn’t happen very often. The goal is to create something stronger.”

Said Grau: “We’re doing more mergers in last 18 months than in I’ve seen in the last 25 years.”

Another set of terminology that’s important to get right, Grau said, is the different terms used to describe advisor practices—books, practice, business and firms.

A “book owner is someone that is more FINRA related—it’s all about production, they are a sole proprietorship, they don’t have an entity, they don’t need one. They work under somebody else’s roof” generally a 50/50 revenue share, Grau said.

A practice, on the other hand, “has an entity—one owner, one shareholder, one member,” and it’s usually and S Corp. or an LLC, Grau said. Practices can be worth $3 to $4 million, and “they surround themselves with book owners.”