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Succession planning is an often-talked and written about topic for good reason. The baby boomer cohort is moving through the financial planning profession just as it is society as a whole. The leading edge is now age 70 and the average age of CFP® professionals is 50. You might have noticed the graying locks and shiny heads at a recent Social Security planning workshop you attended. No doubt, they’re contemplating their own claiming strategies as much as those of their clients. So with that as background, I offer here one more article on the subject of practice succession.

FP Transitions estimates that fewer than 5 percent of advisers have formal practice succession plans in place. As I wrote about in my December 2015 Journal column “When the Old Horses Run,” I suspect the reasons are:

  • We baby boomers cling to the notion of eternal youth. Planning for a retirement exit is an admission of our advancing age.
  • Because practices typically sell for a multiple of 2.5 to 3 times recurring revenue, many conclude that if they kept their practice they’d earn that much back in as many years. And they’re not really working that hard anyway.
  • It’s a daunting task and you actually have a practice to run.

Prioritize Competing Objectives

In contemplating practice succession, as with the financial planning process, it’s important to establish and even prioritize competing objectives. Those objectives might include:

  • Take care of my clients
  • Take care of my employees
  • Build a business that will continue beyond me
  • Have a business for my family members to come into
  • Maximize sale price
  • Retain control
  • Continue working for many years/indefinitely
  • Be able to “get away”
  • Reduce work hours
  • Reduce complexity and responsibilities; just do the fun stuff
  • Quit now/soon
  • Increase my income

Fundamentally, there are only two types of exit strategies: an insider transition and an outsider transition (with variations including mergers and roll-ups). The former entails transfer to an individual (or individuals) in the firm, the latter to a yet-to-be identified outsider. My sense is most advisers would prefer to transition their practice to someone with whom they and their clients are already familiar. Further, they prefer that the prospective successor reflect their values, philosophy, and approach. In short, they want to nurture their own successor. This approach may be most suitable for those with at least a five-year time horizon, a desire to build and leave a legacy, retain control, and even increase their income. The problem is, human nature often stands in the way.

Are You a Nurturer?

Many of us are lousy nurturers, or at least we’re not ready to undertake a mentoring responsibility, and we may not realize it. To find out, start with a self-assessment. A potentially more painful yet truthful assessment might entail seeking feedback from friends, colleagues, family members, or even a professional.

Not being a shrink (except for some practical experience gained parenting three millennials), I might offer the following criteria for determining your likelihood of mentoring success:

A Nurturer:

  • Is patient
  • Willingly shares
  • Is a team player
  • Recognizes and rewards
  • Sees potential
  • Enjoys coaching

Not a Nurturer:

  • Is Impatient
  • Doesn’t play well in the sandbox
  • Demands the limelight
  • Feels no one else is good enough
  • Doesn’t understand why others don’t “get it”
  • Would expect a new associate to learn it the hard way, bringing in business, just as they did

While, admittedly, the aforementioned are a bit tongue-in-cheek, if a reasonable assessment results in more checkmarks under “Not a Nurturer,” then developing your own successor for an internal transition may not be right for you. If you’re still unsure which you are, ask yourself this question: over the years, have I built a loyal support staff with high retention, or have I been beleaguered with high turnover? If the latter, while they may not have pinned their resignations on you, the proof, as they say, is in the puddin’.

A Strategy for Successful Nurturing

Recently, I had an interesting conversation with a very successful planner, Karen DeRose, one of Investment News’s recent “women to watch.” She is delighted with the progress of her succession plan. Her son, Anthony, has been with her now for four years and is developing nicely. He is her heir apparent, though that’s some years off.

She offered that when she first began nurturing a successor she had two failed attempts. “I wasn’t ready,” Karen said. “I wasn’t ready to share my time and my expertise. I wasn’t ready to mentor. I also wasn’t ready to give up control in my client relationships and in my income. I expected them to bring in their own clients.” Both individuals ended up at other firms.

“I had an epiphany a few years ago brought about by a combination of events,” Karen continued. “Several illnesses occurred in my family, reminding me of my own mortality. I turned 50 and realized I didn’t want to work forever. I was at capacity and felt I couldn’t grow beyond it. But after attending a practice succession workshop, everything came together.”

She resolved to train Anthony the way her father had trained her: joined at the hip. Anthony was paid a market competitive salary for one year. The second year he began to receive 10 percent of all revenues.

“Anthony has become a mini-me,” Karen said. “He’s learned the planning process and he’s also learning the selling process—presenting and closing.”

Fortunately, Karen’s broker-dealer also provides a “Gen 2” training program, supplementing her efforts. Four years later they have implemented a buy-sell agreement covering contingencies of Karen’s death and disability. Ultimately, she’ll sell the practice to Anthony and perhaps others in the firm.

Succession Strategy Equals Growth Strategy

As so often is the case, what began as a practice succession strategy was also a growth strategy. Her seven-figure practice has grown nearly 40 percent in four years! While hardly an old horse, the expression “the old horses run faster when the young ones are in the corral” clearly applies here too. Energy and enthusiasm are contagious, and added talent and capacity pay off. Based upon her success, Karen is about to mentor another staff member desirous of moving from an administrative to a planner function, using the same approach.

I asked Karen, “Would you have done it the same way if Anthony wasn’t your son?”

“Our clients are really, really, really dependent upon us,” Karen said. “They are families whose fortunes are in our hands. We’re running a business and need to think about the consequences of our futures for our teams, our clients, and our own families. And we’ve built great value and need to ensure we preserve and capitalize on it. So the answer is yes.”

Great advice for us all. 

Richard P. Rojeck, CFP®, is a managing director with Lincoln Financial Advisors, a broker-dealer, registered investment adviser and member of Lincoln Financial Group. He has more than 30 years of experience in the personal financial and investment planning profession. He is immediate past-chair of CFP Board’s Board of Directors and was instrumental in the founding of FPA.

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