TRANSITION TALK

FP Transitions conducted most of its work by phone and video conferencing long before the virus made this approach commonplace. So, it is with a great deal of humility, and a little courage, that we admit that even after two decades of honing our craft, we’re still perfecting how to provide consulting solutions in this fashion, to this unique profession.

Providing advice over a phone line or a computer isn’t all that difficult; what’s harder is gathering enough high-quality and relevant information to diagnose the problem or problems and then to provide customized, accurate and practical solutions. To do all that, we’ve had to learn how to listen at a professional level–and we had to design those systems and processes almost from scratch.

The mistake that almost all consultants and coaches in this industry make is to try to get an advisor on board as quickly as possible so that, as information providers, they don’t give away too much up front or spend too long trying to help only to be passed over as the service provider. The process usually comes down to 30 minutes of discussion and then a quick diagnosis that best fits what the consultant or coach has to sell, rather than what the client truly needs.

We don’t do it that way.

Today’s Independent financial advisors face an endless array of challenges and opportunities. Identifying challenges before they arise is key for finding solutions and developing strategies for tackling the issues that present the greatest opportunities for improvement and growth.

The four biggest opportunities are:

Professionals working in the independent financial services industry tend to organize their business the same way as other professional service providers. Whether a dentist, lawyer, or wealth advisor, chances are that the firm owner is both a full-time employee and an active manager of the business as well as a shareholder. We are often asked in our consulting work about this dual role; shareholder and employee, and the interplay between them, particularly as it relates to compensation strategies. For example, should employees be rewarded with stock, or the opportunity to buy stock for achieving certain targets? Or, now that I am an owner, shouldn’t I get a raise?  

There are no simple answers to these questions, but context should help to understand the thought process required to make informed decisions when these issues inevitably arise.

Salary vs. Profit Share

At a first level, ownership and pay are distinct concepts with unique rules, purposes, benefits and risks. These concepts represent the division between the return an investor receives on the capital put at risk and the reward received by an employee for the work that is performed. This division should be simple, self-evident and unbending, but the reality in a small business is often far different. The smaller the company, the harder it is to maintain a distinction between ownership returns and compensation. In the most basic model, a one owner company, the black and white lines dividing a return on investment and wages for work often disappear completely.

Your principal advisor has invited you to become an owner. Congratulations! The majority of next-generation advisors are energized by the demand for and the opportunity of succession planning, but most founders are stalled leaving successors frustrated. Your challenge as a successor is helping to make the process work for everyone involved. One important way to do that is to recognize the principal owner’s impediments and to help him or her understand the process and how accessible it actually is.

The Primary Obstacle

Like you, most successors—hamstrung by student debt, mid-stride in buying homes, building families, and still growing in their careers and earnings potential—don’t have money to invest in a business. Eager founders (“G1s” or first-generation owners) may seek to remove these obstacles by gifting or granting ownership, but this can taint the relationship as G1 may ultimately feel short-changed by giving away part of the business they built with their own sweat and toil. Beginning a partnership where one side feels cheated isn’t an ideal way to launch a successful, satisfying transition. There has to be a better way. In fact, many founders and successors come together each year with plans that are truly win/win. So where does the money come from? In many cases, the answer is the business itself.

In our first book “Succession Planning for Financial Advisors,” founder David Grau Sr., JD recounted one advisor’s early succession journey, including his ownership team’s bumps and triumphs as they executed the first tranches of their plan. Today, David circles back to provide an update on the successor team and all they’ve accomplished in six short years:

Ten years ago, around 2009, the founder and sole owner of Diversified Financial Consultants in Wilmington, Delaware, hired a local business attorney to help him develop a succession plan for his financial planning practice organized as an S-corporation. Calling on a practice’s local business attorney is a common starting point, and interestingly, it seems to be a common failure point when attempting to mesh the goals of the founder and next-gen advisors.. In this case, the founder’s attorney strongly suggested that in order for the founder to maintain full and unfettered control, the best course of action was a phantom-stock plan.The first draft was professional and thorough. It was also rejected out of hand by the team of prospective owners – they wanted to be real owners and investors in the business they were helping to grow.

The sustainability of financial services businesses depends on the incorporation of new talent. The demand for next-generation talent continues to increase as longevity, continuity, and staying competitive become top priorities for many financial advisor-owners.

Next-generation advisors are in a unique position to leverage their generational experiences and opportunities that influence business value to carve out their ideal career path.

Opportunities Abound

The demand for financial advice is growing faster than the number of financial planners available to provide it. Household assets are increasing and the number of households with over $200,000+ in income has increased 10% in the last two years and is expected to climb.¹ Along with accumulating their own wealth, younger investors are set to receive inheritances from their parent’s generation. The need for asset management is further exacerbated by the fact that the average age of financial advisors trends older so many are set to slow down or retire over the next ten years.

The battle for talent is upon us and it is important to recognize that as a next-generation financial planner, you have more career choices than ever. You can start your own business, or seek employment at a broker-dealer, bank, wirehouse, or RIA. Even those choices have many options within themselves. For instance, in terms of joining an RIA, 15 years ago, small firms were often the only option. Today, you can work for a smaller regional enterprise, a national company with hundreds of advisors and staff, or an RIA somewhere in between.

We all know what an entrepreneur is. Many independent financial advisors would likely identify themselves as an entrepreneur. 

Many entrepreneurs worked 18-hour days to get their business off the ground and wore all the hats in the company–CEO, Marketing Director, H.R. Manager, IT Coordinator, Bookkeeper, and Visionary. They are their own boss. They create new things. They continuously solve problems. They have initiative. And, importantly, they can tolerate risk more than most people. 

A lesser-known term is "intrapreneur."

When should you start developing your exit plan or succession plan?

The short answer is: start the planning process early. Successful internal succession planning can be a 10- to 15-year process so give yourself adequate time. For advisors who want to sell externally, the planning process should start three to five years before you think you’re ready to actually sell.

Projecting an Off Ramp

As you forecast your exit timeline it’s important to consider factors like cash flow and how much will be required to move into retirement and maintain your desired lifestyle. You should also consider how long it will take to put your successor team in place and when you’ll be able to hand over the reins completely.

One of the best ways to make a timeline projection is to determine how much time you want to—or will realistically be able to—spend productively working in the office, and create a “workweek trajectory.”