TRANSITION TALK

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:

“Instead of focusing on the circumstances that you cannot change—focus strongly and powerfully on the circumstances that you can.” –Joy Page

One of my favorite movies of all time is Casablanca. This 1942 American romantic drama is revered for its cinematic quality, lead characters, fantastic writing, and pervasive theme song “As Time Goes By.” It is set in a time of war, upheaval, and great uncertainty; in fact, the movie is the perfect foil for the underlying message that we control our fate through direct action. There are many scenes that highlight that message, but Joy Page was a part of one particular scene that foreshadows the ending of the movie and reinforces her thoughts as expressed above.

In this scene, Humphrey Bogart, playing the lead character Rick Blaine, tells the husband of a newly-wed Romanian couple to make a bet on the roulette table at Rick’s Café Américain casino. To summate the plot line, earlier in the movie, Rick had turned down helping the newly-wed wife played by Joy Page citing that he helps no one to avoid the suspicion of the Vichy police.

As the plot line continues, Rick has a change of heart and whispers in the husband’s ear to make a risky bet on the rigged roulette table. With a little help, the husband wins enough money to buy a passage out of Casablanca for himself and his new wife. The action that Rick takes in this scene foreshadows his later actions that free Victor Laszlo and his wife, Ilsa Lund, from the Germans and Vichy Police in Casablanca. The rest is cinematic history.

In times of uncertainty, it is always wise to focus on what you directly control, as pointed out by Ms. Page’s quote. Whether we look at current politics, markets, regulation, news, or the current state of the financial services industry, there have been (and always will be) many events outside of your control as a practice owner that affect your work. How do you deal with this constant noise? Recognize it for what it is and focus on the things you can control with direct action.

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.”