If advisers want to pass the reins of their firms to a junior partner, it is best to implement a succession plan early, even decades in advance.
Putting a succession plan in motion early often increases employee engagement and retention, says David DeVoe, managing partner and founder at DeVoe & Co., a San Francisco-based registered investment adviser consulting firm.
“Your best people become partners and then behave like partners,” he says. “And your junior people see the path to partnership and perceive a better-managed firm.”
Catherine Seeber, a CFP and a vice president and financial adviser at CAPTRUST in Doylestown, Pennsylvania, says that an internal succession plan shows that there would be little or no change in the business, which provides comfort to clients that there is “focused longevity.”
Passing the baton internally can also help retain talent long term when those succeeding see options for personal growth, and the owner can leave “with a sense of pride and accomplishments that they have left all in good hands, leaving a legacy,” she says.
A buyout agreement typically contains an earn-out arrangement where the seller receives compensation over time and if clients stay at the firm, says Robert Pagliarini, a planner and author of “The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth into Lasting Wealth” (Harbinger Press, 2015).
“A seller who wants the most money in her pocket would be wise to introduce the successor early and often to clients over a number of years, to ensure that clients feel comfortable and stay with the firm,” says Pagliarini, a CFP who is also president of Pacifica Wealth Advisors in Mission Viejo, California.
A word of caution, though, says Mark Schoenbeck, a CFP and senior vice president of business consulting at Kestra Financial in Austin, Texas.
“Personalities, conflicting visions of the future or an inability to embrace change often derail the plan,” he says. “In addition, the need for longer-term seller financing extends the seller’s monetization period and gives them an excuse to stick around longer than what is often in the best interest of the acquirer, company and clients.”
Still, higher engagement typically results in a better performing and consequently more valuable firm, whether advisers eventually sell to junior partners or to third-party buyers, DeVoe says.
“The better you’ve structured a credible internal succession, the more attractive you are likely to be to an external buyer,” he says.
This story is part of a 30-30 series on smarter succession planning.
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