Handing over one’s life’s work is a process at once emotionally taxing and strategically complex.

For advisers running their own registered investment advisers, having a long-term succession plan in place is critical to safeguarding the continued success of both the firm and the clients that they serve.

To ensure a smooth transition, the focus must be on building a valuable business that is attractive for sale and keeping all options open, said three succession experts during a Financial Planning webinar covering best practices for succession planning.


“The fundamental question is who in their right mind would buy a firm that’s centered around me? It is my firm, my relationship with clients, my intellectual property and my business strategies,” said John Burns, co-chief executive of Exencial Wealth Advisors in Oklahoma City, an RIA managing more than $1.5 billion in assets.

If that is all that the firm offers, then it will be a hard sell, he said.

Better to start crafting a business that is less about the principal or owner and more about the client service and talent that would turn it into a valuable prospect.

Doing so isn’t easy and takes time, which is why advisers should start as early as possible, Burns said.

Burns, 52, started planning for his succession in earnest when he was 46. He hired a third-party consultant to valuate his firm top to bottom and construct a strategic plan to strengthen growth areas and improve weaknesses.

Burns was then able to set specific objectives and action items with binary results that made it clear whether he was on the right track.

“The process isn’t much different from creating a wealth management plan for an executive client,” he said.


A critical element of making the strategic plan work is positioning the right people in the right places who can build each key area of the business, Burns said.

In order to do so, the firm owner needs to outline clear career paths, offer a competitive compensation plan and change the business structure to allow for additional ownership tracks.

That solid talent base can then become the foundation for developing an internal succession plan, said Michael Nathanson as part of his webinar presentation on the key differences between internal and external succession.

Nathanson is the chairman, chief executive and president of The Colony Group in Boston, which has more than $5 billion in assets under management.

Internal succession is really about “attracting, developing, engaging and retaining” the best people and promoting them over the years to become the next owners of the firm, he said.

On the other hand, external succession plans -- a “scary concept for a lot of people” -- involve mergers and acquisitions, Nathanson said.


Most advisers prefer the former.

Indeed, 78.2% of webinar participants, in response to a live poll, said that they are more likely to have an internal successor.

Nathanson was one such strategic hire for The Colony Group after serving as its outside counsel. The firm spent 25 years of its 30-year history building an internal succession plan, slowly expanding its roster out to 20 owners.

It enacted a formal succession plan in 2011.

The process doesn’t end there however, as the company is constantly thinking about succession planning even now that the next generation is fully in place and it has everyone it needs, Nathanson said.

“Succession planning is what every good business at every stage should be doing,” he said.

The decision doesn't have to be binary.

Some of the best succession plans are both internal and external in nature, Nathanson said.

He also warned that the timing and dynamics of an internal plan could be tricky, as the successors may become discontented with paying principals large installments as part of the buyout even though they are providing fewer and fewer services.


Even if selling the firm outright isn’t under consideration, the risk to a potential buyer is lower when the internal succession plan is taken care of, said John Furey, founder and principal of Advisor Growth Strategies, a Phoenix-based consulting firm that specializes in RIAs.

Having a lot of internal partners who can potentially take over actually increases the value of the firm, Furey said.

He pointed out that the conventional valuation rules of thumb, such as two to three times fee revenue, four to seven times earnings before interest, taxes, depreciation or amortization, or one to two times commission revenue, aren’t used in reality.

Buyers are really looking for long-term value as measured by size, a sustainable growth rate, human capital and client demographics, Furey said.

When those elements are missing, deals can stall.

“Buyers have preconceived notions of how much a firm is worth, but the seller doesn’t agree,” Furey said.

Accordingly, owners need to keep an open mind, he said.


At the end of the day, succession planning should be about what is best for the client, Nathanson said.

In fact, he prefers to call the process “continuity planning” because it is about -- or should be about --continuing to provide quality service to clients, rather than designing an exit that will benefit the principals the most.

Indeed, the fiduciary standard applies just as well to mapping out the future of a firm as financial planning, Nathanson said.

Whether the succession is internal or external, strategic or not, “we have to think about the clients," he said.

“What’s best for them may not necessarily be consistent with the absolute best transaction for us,” Nathanson said.

This story is part of a 30-30 series on transitions. It was originally published on July 29.

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