Should advisers do a “test run” with a potential buyer of their practice?
Maybe not letting them take the reins, but variations of a test run could prove insightful, experts say.
Some companies create a joint venture, where they oversee new, shared clients while continuing to maintain their previous businesses separately, says Tim Kochis, a managing director at DeVoe & Co., a San Francisco-based registered investment adviser consulting firm.
In other cases, there are clauses to make unwinding a merger relatively easy if it isn't going as well as hoped.
Although there may be some rare cases where these “half-pregnant” approaches may be successful, they aren’t considered best practices, Kochis says.
“If a merger is built on the delicate foundation where either party can exit the transaction during a challenging time, the transaction is likely doomed,” he says. “Most relationships have stressed periods, and what makes them stronger is the necessity for the parties to work through the issues.”
A better approach is taking the time to conduct enough due diligence on the potential seller and get to know the party and then commit.
“Going into a relationship with deep conviction about the potential for success is much safer than the illusory ‘safety’ of having an easy exit plan,” Kochis says. “That easy exit almost guarantees failure.”
Too many firms use “the Tinder approach” to succession planning, looking for what appears attractive but then don’t go any further, says Robert Pagliarini, a planner and author of “The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth into Lasting Wealth” (Harbinger Press, 2015).
Pagliarini, a CFP who is also president of Pacifica Wealth Advisors in Mission Viejo, California., says that another variation of a test run is conducting joint workshops or seminars.
“How was planning the event? Any drama? Ask your clients what they thought of the other adviser,” Pagliarini says.
“Did they trust her and feel confident in her knowledge?” he asks. “Doing a co-event can answer a lot of questions.”
Mark Schoenbeck, a CFP and senior vice president of business consulting at Kestra Financial in Austin, Texas, recommends against test runs.
“Similar to buying a house, most sellers won’t let you come in and live in it for a few months prior to deciding to buy,” he says. “Instead, do your own due diligence.”
Advisers should meet the people, ask tough questions, talk to others that have worked with the firm and finally, trust their instincts, Schoenbeck says.
“First and foremost, this is a relationship business,” he says. “You have to know, like and trust the people you are going to sell to.”
This story is part of a 30-30 series on smarter succession planning.
