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How to pick the best successor for your firm

Over the past two years, the number of calls I have received about how to successfully transition ownership to an internal successor has dramatically increased. It's about time. Two-thirds of financial planning firms now are developing an internal successor and 45% have a working plan in place or have recently implemented their succession plan, according to this year’s FA Insight People and Pay study.

I generally tell firms that, to develop career tracks, expand ownership and effectively transition leadership from one generation to the next, there should be a strategic plan to institutionalize their business models. This plan includes taking on more owners and making sure ownership is less concentrated, creating ownership opportunities for younger team members and working alongside internal successors to ensure a smooth transition.

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Succession seeks to address two vital issues and it’s an integral part of a broader strategic planning process. First, how will the business grow and create value for clients, owners and employees? Second, how will the business transition to a new generation of owners while preserving its reputation and legacy?

Transferring the firm’s value in succession is the cornerstone of the planning process. The value is dependent upon the strength of the firm’s operational processes — the skills and capabilities of staff. To create transferable value, firms must be able to demonstrate that not only is the business productive, profitable and growing, but also that it can continue to function successfully after the founder(s) depart.

To address succession challenges, firms should develop and implement a human capital strategy. The strategy should include:

  • Creating a scalable organizational structure that transition from employees doing multiple job functions to more role specialization (lead advisor, service advisor, support advisor), including creating dedicated management roles (operations manager, director of client services, chief operating officer, chief compliance officer) and defined career paths for the advisory, investment management, and operational areas of running the firm.
  • Focusing on performance and career development, including formalized coaching and mentoring programs.
  • Aligning both short- and long-term compensation structures so that potential new owners can afford to buy ownership over time.
  • Developing sound criteria for the core competencies and traits of a successful owner and leader.
  • Mapping a realistic timeline that allows for the smooth transition of clients and the management of the firm.

As most successions are managed as phased-out exits, your human capital practices are essential: First the owner backs away from the daily operations, then delegates management responsibilities for the firm and clients and finally sells the ownership stake.

One of the most successful examples I have seen was a founder who created a strategic succession plan to find her replacements. She recognized it would take three internal successors to replace what she had been doing and grow the firm to the next level. Once she identified the candidates, she gave herself enough time — six years — to develop them. She divided firm operatings into three areas — one for each of them; 1) management of the firm’s business development and growth plans, 2) management of the financial planning process and advisors, 3) management of investment management of the client’s assets and the firm’s financials.

She transitioned her clients over a three-year period. By the last year, 100% of her clients had been transitioned and she was working part-time. When she retire completely she had not only transitioned all the clients, the day-to-day running of the firm, and the sale of her equity, but she had started her own successful transition into retirement.

The right people
To make succession efficient and effective, firms must have the right people in place with suitable skills at the correct time. For this to happen, their owner-candidate development processes should focus on the core competencies of successful partnerships. These should be built into the recruitment and development process, as well as rewarded through the compensation plan.

When assessing succession candidates, character and culture fit, shared vision and leadership are as important, if not more so, than financial criteria. Important because current owners will likely have to work side-by-side with new owners for years — perhaps even decades. Candidates can make their revenue numbers and be technically competent, but if they don’t match with your culture, it can cause serious problems in your firm someday.

Also keep in mind that there is no substitute for observing and working with people over time to gauge their cultural and leadership qualifications. Determine who has the potential to be a future leader and then provide them with opportunities, events and situations to see how they respond. A future owner must not only be able to grow the firm, bring in new clients and be outstanding advisors, they must be able to lead, manage and become part of the leadership team.

The importance of leadership qualities in successors are borne out by the FA Insight study, which lists the top three leading factors considered when assessing a new owner as: “character, values and fit with firm culture” (71%), “shared vision on firm growth strategy” (37%) and “leadership and management ability (35%).

Bringing up the rear in that study are: ability to engage with clients ( 27%), business development ability ( 26%), entrepreneurial spirit (18%), professional maturity (16%), ability to manage complex clients ( 14%), financial commitment (10%) and ability to mentor and develop others ( 6%)

To these factors, I would add the following core leadership competencies for evaluating partner candidates that I have used in my consulting work:
Establishing focus: The ability to develop and communicate goals in support of the business’ mission.
Fostering teamwork: The ability to demonstrate interest, skill and success in getting groups to learn to work together.
Empowering others: The ability to convey confidence in employees’ ability to be successful — especially at challenging new tasks; delegating significant responsibility and authority; allowing employees freedom to decide how they will accomplish their goals and resolve issues.
Managing change: The ability to demonstrate support for innovation and for organizational changes needed to improve the organization’s effectiveness; initiating, sponsoring and implementing organizational change; helping others to successfully manage organizational change.
Developing others: The ability to delegate responsibility, to work with others and coach and develop their capabilities.
Managing performance: The ability to take responsibility for one’s own or one’s employees’ performance by setting clear goals and expectations; tracking progress against the goals; ensuring feedback; and addressing performance problems and issues promptly.
Attention to communication: The ability to ensure that information is passed on to those who should be kept informed.
Influencing others: The ability to gain support for ideas, proposals, projects and solutions.
Building collaborative relationships: The ability to develop, maintain and strengthen partnerships with others inside or outside the organization who can provide information, assistance and support.

It’s also important to assess these attributes and be open to working with outside resources to coach your partner candidates successfully. Implementing 360-degree assessments and peer reviews, providing ongoing feedback and creating promotional opportunities for development are essential to advancing internal candidates. Incorporating an annual formal assessment of these competencies and tying compensation decisions to the results will help to reinforce the path to partnership.

Finally, I suggest developing a solid understanding of the most significant challenges your firm and the advisory industry are likely to face over the next five to 10 years, i.e., fee pressures, recession, regulatory changes, aging of the client base, etc. —, and the skills and experiences future partners will need to clear these hurdles. After all, leadership succession requires looking through the windshield, not in the rear-view mirror. Investing in a credible forecast makes it possible to hone in on the skills and capabilities needed to continue the success of your firm.

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