The succession planning alternative

Transcription

1 The succession planning alternative A practical approach to transition and contingency planning Independent thinking. In partnership with InvestmentNews Research

2 Executive Summary The maturing of the nation s corps of financial advisers has spawned a growing body of literature that focuses on one key theme: The need for independent financial advisers to create a succession plan in order to provide continuity for their clients and to realize the full value of their business or practice. Accompanying this message is usually the baffling statistic that some half to two-thirds of advisers have not developed a succession plan and that a sizeable minority nearly 25%, according to a recent InvestmentNews Research study lack the time to implement one. If the issue is so important, why do so few advisers devote time or resources to it? While not negating or minimizing the importance of succession planning especially for larger practices and businesses it may be appropriate to look beyond a best practices approach to the issue and examine: Why so many advisers are reluctant to engage in succession planning. Why contingency and transition planning may be a more realistic path. How to create and implement contingency and transition plans. By offering an alternative view of succession, this paper is intended to encourage advisers to think more critically and realistically about the future they envision for themselves and their practice. The succession planning alternative 1

3 Why the Reluctance? When asked why they don t have a succession plan or why they have not made more of an effort to develop one, many advisers will explain often almost sheepishly that they are just too busy to get around to doing one, or that they ve started to develop a plan on several occasions and were diverted by more pressing business. Ironically, based on findings in the 2014 InvestmentNews Financial Performance Study of Advisory Firms, the majority of advisers do plan to retire or sell their business but no time soon. Some 20% said they would retire or sell their ownerships take in 16 or more years, 27% in 11 to 15 years, and another 20% in seven to 10 years. But since the average age of advisers surveyed was almost 55, it would seem that many successful advisers don t really plan to give much thought to succession until they are about 70! If given an opportunity to speak freely and without sensing that they would be chided for a failure of management, many advisers would admit that they never get around to starting or completing a succession plan because they actually don t want to sell their business/practice or turn it over to someone else perhaps ever. Yes, they believe they have built a great business and, yes, if someone came along with a big check many wouldn t refuse it. But for most, the pot of gold at the end of the rainbow is more of a reverie than a likely scenario; many advisers are satisfied with the real-world probability of continuing to engage in work they truly enjoy and continuing the relationships they have developed with customers and clients. In fact, most want to keep doing what they do, but ideally just want to do somewhat less of it as they get older. Therefore, for advisers giving thought to their future, the emotional and work/life personal questions raised by succession often are more compelling than the traditional personnel and organizational aspects of succession planning, such as selecting the right successor(s) and creating/implementing business procedures that give form and stability to the enterprise, or succession s financial considerations, which include business valuation and structuring the purchase/sale. Moreover, traditional succession planning focuses on how the adviser can extract value from the business and arrange its operations so that his or her personal input is minimized or eliminated an orientation often inimical to many advisers emotional need to continue working and serving their customer base. Taking advisers aspirations and value-driven needs into account, as well as financial and operational factors discussed below, experienced advisers may do well to consider a transition plan for their later years as an alternative to a formal succession plan. Identifying Value in Transactional Businesses Decades of empirical evidence and tens, if not hundreds, of millions of dollars spent on training and development programs underscore the securities industry s difficulty in identifying and developing successful registered representatives. Everyone seems to agree on the qualities that make for a successful licensed person (whether called a financial adviser, financial consultant, investment consultant, broker or rep) are numerous and diverse. They involve selling skills, a customer orientation, enthusiasm and a desire to control one s own destiny. Yet while many candidates possess these skills, only a select few have them in the right combination or, perhaps, sufficient determination, perseverance and/or luck to succeed. 2 Cadaret, Grant & Co., Inc.

4 Those advisers who reach take-off velocity and succeed (and, many times, leave the employ of a wirehouse to go independent) often concentrate on particular market niches or specialties where success leads to a virtuous cycle of referrals. Many advisers, for instance, specialize or develop a particularly large client base among certain professionals, such as airline pilots or dentists. Others focus on a product, such as municipal bonds or closed-end funds, while some develop expertise in specialized areas such as restricted stock transactions. As a result, each transaction-oriented adviser s business is somewhat different in terms of products sold and customers served. The common thread is that clients are tied financially and emotionally to the adviser. It s their adviser with whom clients had a bond, not a firm, an organization or a particular administrative format. Traditionally, the businesses or practices of transaction-based advisers had little enterprise value, given their adviser centric nature. After all, how likely would it be for a potential buyer to share the precise investment orientation of the seller, as well as be similar in personality, temperament and style and mesh seamlessly with an adviser s current client base so as to minimize client defections? As a result, prices for transactional businesses tend to be more difficult to determine than those for businesses where most or all revenue takes the form of recurring fees. Over the past two decades, however, the advent of 12b 1 fees has transformed transactional practices by creating a base of recurrent fee income. Combined with the growth of hybrid practices, this shift in business model creating practices and businesses that have more enterprise value than a traditional commission-only business has given more career- and retirement-planning options to advisers with a transactional legacy. While their now more valuable enterprises may now warrant the effort of full-scale succession planning, many advisers may wish to consider the possibility of having contingency and transition plans in place. Contingency and Transition Planning Advisers whose primary objective is to continue working as long as possible perhaps at a somewhat lesser pace while maintaining their lifestyle are likely to benefit from having contingency and transition plans in place. In a sense, having such plans are like creating an insurance policy and an income annuity for the practice. Of course, Finra Rule 4370 requires broker-dealers to develop and maintain a written business continuity and contingency plan and to establish procedures relating to an emergency or significant business disruption. Beyond what s required for themselves, many broker-dealers have contingency plans in place for their affiliated representatives, covering natural disasters and emergencies of all types. About 75% of advisers at independent broker-dealers also have their own contingency plans, according to a recent survey by the Aite Group. And many advisers undoubtedly have worked out such plans informally or have made some of the arrangements that such plans entail. Having formal plans contingency and transition plans committed to paper, however, can markedly improve the well-being of any adviser, his/her business and its clients. So important is contingency planning, in fact, that Securities and Exchange Commission Chairman Mary Jo White said at a recent conference that the SEC may introduce rules in the fall that would require advisers to put a plan place for a major disruption that could disable them from serving their clients. While such rules would apply only to registered investment advisers under the SEC s jurisdiction, the issue clearly affects all advisers. Having formal contingency and transition plans can markedly improve the well being of any adviser. The succession planning alternative 3

5 A contingency plan involves consideration of two essentials: people and technology, and what would happen in the event of disruptions to either. Of course, once a contingency plan is developed and put in writing, the final document should be discussed with family and office staff, with copies kept in a readily available and well-known place(s) so it can be accessed if and when needed. Also, run a copy by your compliance department and offer a final copy to your broker-dealer. On the technology front, the best place for an independent adviser to start gathering information and formulating a plan for one s own business is with the technology and back-office staff at your broker-dealer. Some of the work involved in developing the technology-related aspects of a contingency plan could involve secure storage of customer records off-site, back-up plans in case of power outages or natural disasters, procedures for accessing PINs and other secure codes, and other privacy and security matters. A good place to start contingency planning is with clients. On the people front, a good place to start contingency planning is with clients. Are all their account records up-to-date? Are beneficiaries on their IRA accounts and insurance policies whether or not held with you current? Do you have all their cell phone numbers and addresses? Who and how would they like you or a team member to call or contact them in case of a business emergency? Checking in with clients to update this information not only reassures them about your commitment to providing excellent service, but also affords you an opportunity to learn of recent changes in their lives, which may require modifications in their investment positions. Of course, the central and perhaps most challenging key part of contingency or continuity planning is determining the person or people who would take over for you if you were temporarily or permanently unable to continue working. Here are three suggestions: 1. Have at least one other member of your team become registered. Even if handling orders is not part of their job function, they should be able to execute orders in an emergency. 2. Discuss your contingency planning with your broker-dealer and ask them for help in seeking out nearby affiliates with whom you may be able to arrange a reciprocal back-up arrangement. 3. Discuss contingency planning with other advisers in your network and with non-affiliated advisers in your area and learn what do s and don ts they suggest. Once planning for the what ifs is handled, it s time to consider other future events. If an adviser s primary goal is to continue working as long as possible, transition planning may be more appropriate than succession planning, which is often integral to the planning and preparation for a practice sale. In fact, one can view transition planning as a process that aims to extend a practice s income stream; succession planning can be seen as part of a process that aims to capture the enterprise value of a practice. For many advisers, the financial and lifestyle rewards of having income over a longer time span may be greater than an equivalent cash value of practice sale. There are many directions transition planning can take: If your practice already is an ensemble and consists of younger advisers whose investment styles and personalities mesh with your own, consider a formalized agreement through which your B, C, and D level clients are handled as part of a team with one or more of your ensemble members. Revenue from this teamwork can be pooled with younger member(s) receiving 4 Cadaret, Grant & Co., Inc.

6 a larger share, and doing more of the work, over a specified time period that matches your plans. Over time, you may wish to transition your A list clients to the pool. If you are a sole practitioner, consider adding a junior adviser and working out an arrangement similar to that above. Yes, finding someone with whom you are compatible isn t easy, and many advisers have been disappointed when trying to find a junior version of themselves. But it is possible, and to help increase the odds of success: First, explore whether younger family members or family members of friends may be interested in a financial advisory career and joining your practice. This, of course, is the traditional transition and succession path in the advice business, and while it presents challenges, it s always worthy of consideration. Talk with the management of your broker-dealer and tell them of your plans. Ask if they know of any advisers in the BD network that might consider joining your practice. Find out about the support they provide to foster or smooth transitions, including any possible financial support. Talk to wholesalers you know and whose products you use. They will know of advisers whose product choices are similar to yours and who may be interested in the kind of work arrangement you may offer. Join local professional groups and ask your peers if they know of local talent who may consider a move to your business. Consider affiliating your practice with another practice within your broker-dealer. In lieu of a purchase of your practice, which would consist of upfront and on-going payments, you can negotiate a long-term transition arrangement similar to that an adviser would create in an intra-practice transition. Conclusion Advisers, perhaps to a greater degree than the clients they counsel, are aware of longevity risk. But the risk that today s near retirement generation of advisers likely will live longer than anticipated and require more financial resources also presents great opportunities. For many advisers, creating plans and a support system that enable them to continue working, serving their clients, and extend their earning years may represent a more desirable and viable alternative than selling their practice. While succession is right for some advisers, transition may be right for others. The succession planning alternative 5

7 About This White Paper This white paper was co-developed by Cadaret, Grant & Co., Inc. and InvestmentNews Research in March About Cadaret, Grant & Co., Inc. Independent thinking. Cadaret, Grant & Co., Inc. is a privately-owned independent broker/dealer, based in Syracuse, New York. We have been servicing over 900 independent financial advisors in branch offices nationwide for almost 30 years. As a leader in the broker/dealer industry, we offer advisors stability, tools to grow their practice, unparalleled customer service, and the best technology in the broker/dealer world. We make decisions based on the needs of advisors and the way they want to serve their clients. We have found that advisors today are looking to re-declare their independence. And, they are doing it at Cadaret, Grant. Please contact Cadaret, Grant Recruiting for more information at or visit us at RESEARCH About InvestmentNews Research and IN Content Strategy Studio The mission of InvestmentNews Research is to provide financial advisers with the industry s most informative practice management studies and benchmarking reports. Our benchmarking studies are a leading source of market intelligence for advisory firms and industry partners, such as custodians, broker-dealers, service providers and professional organizations. In 2009, InvestmentNews acquired two bellwether benchmarking studies from Moss Adams LLP the Adviser Compensation & Staffing Study and the Financial Performance Study of Advisory Firms. We continue to improve and expand these two critical industry studies, while we have also introduced new studies on technology and succession planning, which support the growth and development of financial advisory firms. In tandem with our IN Content Strategy Studio (INCSS), InvestmentNews Research is now developing custom studies, reports and white papers for some of the industry s most influential companies. INCSS has focused on creating insightful, unique content that empowers advisers and provides firms that support advisers with assistance in understanding and engaging with this important audience. For more information on InvestmentNews Research or IN Content Strategy Studio, please contact Mark Bruno at mbruno@investmentnews.com. Owned by Crain Communications Inc., InvestmentNews is the premier provider of news, data, research and events to the financial advisory industry. Through our weekly newspaper, website, data centers, benchmarking reports and conferences, we provide industry-leading tools and resources that allow financial advisers to learn more about their businesses, clients and competition. 6