For some advisors, selling their practice is not necessarily the best route.
“I am not completely convinced that best plan is where an advisor checks out at a specific age, like at 62, and they monetize their practice,” said Thomas Fee, a principal and managing partner of Minneapolis-based Vector Wealth Management, one of Charles Schwab’s clients. “I find the concept somewhat distasteful.”
Although it is important for financial planners to preserve the monetary value of a firm, client relationships are paramount to that, he said.
Founded 17 years ago, the principals took at least 10 years to develop its current structure, he said. Vector Wealth Management has $400 million in assets under management, and has organized its professionals and staff to take on three related but distinct roles: advanced planning and client services; portfolio management; and advisory.
“Clients are most damaged [when they have] multiple relationships with different financial advisors over decades,” Fee said. “You get this destruction of trust and lack of confidence in that advisor relationship.”
Anticipating an upswing in merger and acquisition activity this year, Charles Schwab [SCHW]published reports last week about succession planning and mergers and acquisitions as interest from financial advisors has reached all-time highs. “Transition Planning: Valuation and Deal Structure,” helps advisors estimate the value of their firms and the type of deal structure that fits their situation. The other report, “Succession Planning: Your Firm’s Future Starts Now,” walks advisors through four essential steps involved in succession planning.
Charles Schwab points out that M&A activity has increased because advisors have become more sophisticated about how to structure deals, holding companies and private equity firms have consistently expressed interest in registered investment advisory firms, and advisors nearing retirement are thinking more about ways to ensure the longevity of their firms.
Succession planning is also important because buying into a firm often takes between five to 10 years and rushing the process can cause mis-valuations and inaccurate assessments, which are serious problems, according to Schwab.
Vector is also being careful about constructing its succession plan. Fee said the company should have a plan in place in the next 12 to 18 months.
“If you are trying to create permanence in the client relationship and in your business, you have to institutionalize the management processes so those relationships are cemented at the firm level, not by a single individual," he said.