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The trade-offs, soul-searching and stress of a succession transition

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For years, financial industry writers and consultants have probed every aspect of how to create a smooth succession for financial advisory practices.

But why aren’t more advisers making use of this body of knowledge to ensure success? And, if they are doing something right, why don’t we hear about them? With these questions in mind, I decided to examine one transition with the hope of gleaning important insight.

Greg De Jong of Naperville, Illinois, by all accounts had a successful succession. The 57-year-old adviser had a multimillion-dollar practice and 95% of his clients stayed after he merged with another firm. That doesn’t mean anything about the process was easy, however.

It’s rare to have someone speak as honestly and openly as De Jong did with me. We discussed the key decisions and issues he faced and the critical factors he considered in his decision. He revealed the emotional and sometimes gut-wrenching process of succession planning, and shared some surprising twists that have much to teach the rest of us.

Greg, merging with another firm can be scary. What got you to this point? I had $200 million AUM and a very healthy bottom line. In fact, I was making more than I had ever expected. My team included another adviser my age and a full-time staff of three plus two part-time. But I had no long-term succession plan. With that in the back of my mind, I hired a younger planner but after a few years he moved on.

Why did you pull the trigger and decide to go with an outside firm?
My trigger was when I was turned down by another young adviser I had been courting. I realized then if he had said yes, I might have put two to three years of hard work training him with no guarantee of the deal working out. If it didn’t work out, I was would be right back to where I started. The stakes are so high when you’re relying on an internal succession plan!

Why did you seek a solution at this point in your career?
My sense of urgency was growing. It was accentuated by the younger ‘Greg’ saying no to my offer. I couldn’t last another 10 years without a resolution. I was concerned.

Were you willing to invest in your own firm growing to assure an internal succession and improve your eventual firm value?
I was willing to reinvest, but only in ways that made sense. I didn’t have the staff resources to figure how to effectively deploy extra dollars. For example, I could invest in more marketing but I wouldn’t know if the dollars were being spent wisely. Again, I felt the risk was too high for me to do it by myself.

Are you saying those who bet on the white knight are deluding themselves — they don’t understand the big risks?
White knights are almost non-existent! What I really wanted was to shed my management responsibilities, and spend more time taking care of my clients and developing new business. I looked regionally and saw a substantial selection of $1 billion to $4 billion AUM firms. Be careful! I found the smaller firms in this range were generally thin in the executive management ranks. I wanted a firm large enough to assure a capable management team.

How important was the extraction of equity?
Very important, but number two behind my most important goal: the long-term well-being of my clients. The ethical obligations weighed heavily on my mind. I care deeply about my clients and do not want them falling into the hands of any charlatans after I retire.

I couldn’t last another 10 years without a resolution.

What did you see as the main risks?
First, I thought long and hard about whether I could work as an employee. Could I answer to others after 18 years of being the guy in charge? Second, would clients perceive this as a net positive change and stick with me? Thankfully, I can report that better than 95% of clients stuck with me and I’m still in charge of my office. Whew!

Were there financial trade-offs?
Yes, which required a lot of soul-searching. My income would decrease significantly, but in exchange I could be an equity stake in a much larger, more stable organization. Was the cash plus real equity of a larger firm better than the equity of my own firm to justify the drop in income? I calculated it would be.

Unfortunately, many advisers are unrealistic about accurately translating their firm’s theoretical value into assets they can actually count on in retirement and leave to heirs. This can torpedo your succession plan.

What else made this a challenge?
The time pressure was tough. I knew dragging this out over 12 months would be a major distraction from client service. I made my choice and closed five months later. So much had to happen in a very compressed timeframe! It’s a lonely decision; I brought my staff, accountant and attorney in on the plan early on but none of them had ever done a deal like this. It was mainly up to me, which stressed me out!

Any surprises?
The biggest was billing. We billed in arrears, and the new firm billed in advance. I woke up one day in a cold sweat: ‘My clients are going to get two bills at the same time and they’ll feel like they’re paying double no matter what I say.’ I swallowed hard and decided to forgo my entire last quarter of fees for my old firm. Had I not done so, I’m sure client retention would have suffered.

Any other big hurdles?
Another issue was the financial risk.

The financial risk from the firm potentially falling apart with nothing left for your spouse?
Yes. With a good merger, that financial risk immediately decreased by orders of magnitude. Becoming part of a larger firm meant no sudden disaster for my wife, my clients or my staff because of my death or disability.

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Other factors?
I placed a high degree of importance on the acquiring firm’s reputation in the industry and community. One firm stood out with multiple industry awards and accolades and a high profile in the communities it served. There were some client questions about size, but the substantial team support and industry reputation helped client retention, and I ultimately retained more than 95% of client assets.

What words might you have for an adviser facing the same challenges you faced?
Seek a firm that will absolutely, positively lower your financial risk. If you don’t have the ability to step outside your own practice and take an objective look at it, get independent advice!

Because you chose to continue to work, how did that affect your decision?
A merger gave me the opportunity to continue doing satisfying work without all the administrative hassles and financial risk. I’ve secured my own financial future and now have two younger advisers working on the team to provide long-term continuity for my clients. I’d say my chances of having my succession plan unfold with no surprises have risen from the 30% to 40% range to at least 95%.

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