TRANSITION TALK

If you’ve been reading my recent posts, you know I consider myself a “win-win” gal.  You’ve read about how the self-discovery of my real win—not owning the business—was key to not only successfully exiting my business, but also launching what I now call “my next chapter.”  

Up to this point, I was primarily speaking of the founder’s win, and that of a buyer. In my research and work with clients who are firm founders, I have noticed that their perspectives on their own personal transition strategies often fall into two camps. That is, some are asleep at the wheel, relying on autopilot; and others are convinced they’ve already got a plan ready to go whenever they are.

In recent months, I’ve come to recognize there is one more win to add to the mix. This realization has come about as I met with a growing number of smart, hard-working “junior” professionals who are frustrated by a lack of clear strategic vision for the firm and their role in it. Even those who are designated successors, described a lack of transparency from the founders regarding the firm’s financial picture, vision and strategy.

It’s been a while since “keeping it in the family,” assumed your literal family. Yet, many advisors approach succession with pride when they have the opportunity to pass their advisory legacy to a son, daughter, niece, cousin, or other relative.

Choosing a successor who is a part of your blood family doesn’t mean the succession process becomes 10 times easier; it doesn’t mean you just hand over the keys one day with a, “See ya later, kid. Don’t burn the place down.” It requires the same careful planning and communication to ensure ownership of the business ends up in the right hands.

Tom and Paul Morrone of US Wealth Management in North Haven, Connecticut have always been a close father / son unit, but that didn’t automatically mean that Paul would step into his father’s shoes one day. Instead, he forged his own path before recognizing the business and the life his father had built was exactly what he was striving for. And still, ownership wasn’t just handed to him.

Tom insisted that Paul EARN ownership, and together they sought help for the succession process. It wasn’t a matter of trust. It was a matter of making sure they hadn’t missed any detail, and that they had the most beneficial path for both of them.

Below, watch the Morrones put their journey in their own words.

Rough Seas

In the heyday of maritime exploration, traveling the world’s oceans promised adventure and immense risk. Turbulent seas and unfavorable weather endangered crews, threatened ships, and spoiled the best-laid plans. Seasoned captains applied skill and experience to determine whether to proceed with caution or seek haven; decisions that couldbring adverse consequences or reap rich reward. 

As the captain of your business, you’ve undoubtedly surveyed the course ahead and evaluated the inherent risks and rewards. Are you prepared to weather these seas? Or is it time to pull into safe harbor? 

This is the third piece in our series with guest writer Laurie Nichols (read the first here and the second here) that chronicles her personal journey of selling her her business four years ago.

After spending nearly 30 years in financial services, including more than a decade wearing the Chief Compliance Officer hat, I don’t often make definitive claims or promises.

However, as I reflect on what has brought me to where I am now—living and working with renewed energy and excited about the future—there is something I know for sure: A successful transition from business owner to an inspiring next chapter starts with looking in the mirror and challenging yourself. 

How I Know

As I started to experience some “mid-life wake up calls,” both personally and professionally, I resisted looking at the truth of where I was in a holistic way.

I was a worrier. A deeply committed worrier who thought the key to financial security and success was to just keep pushing the same old boulder up hill and hoping it wouldn’t roll down.

Picture a bright orange life raft floating on a dark blue, storm-tossed ocean. In this durable, well-built, small craft sits an independent financial advisor. Our advisor has a paddle for propulsion – the means by which to move the raft to safer or more prosperous waters. Our advisor has the means to collect and store rain water for drinking, and fishing tackle to bring in food for survival – the craft literally is floating on a sea of food and fuel to sustain and propel its lone occupant. Our advisor also has a compass for navigation to guide forward progress along a chosen route. 

In terms of organizational structure, this sole proprietorship model is a common starting point for many advisors. With this model a single advisor is compensated on an “eat-what-you-kill,” basis–the clients are under his or her service; he or she receives 100% of the revenue to pay their own individual expenses, and takes 100% of the profits (if any) that remain.

To its credit, this basic production-based, or advisor-driven, model is extremely adaptable and simple to establish and operate. And while it may work for a single advisor office where there are only business expenses and compensation for one, it should not be mistaken for a building block for larger, more sustainable business models. Unfortunately, it often is.

In past years, the slow and steady migration of independent financial service providers to the independent Registered Investment Advisory (RIA) channel has been well documented. As the number of state and SEC registered advisors continues to swell, the regulatory framework under which they have operated will undoubtedly become increasingly complicated.

For years, it has been the practice of regulators to primarily focus their attention on the largest players in our industry. Broker Dealers, Custodians, and product producers have, by and large, borne the responsibility of complying with our industry rules, if not in actual operation, then through procedural and compliance oversight of the independent producer. Call it the cost of success, but the regulatory bulls-eye is–without question–moving more and more toward the independent financial service provider. A perfect example of this is the SEC proposed Rule 206(4)-4 and amendments to Rule 204-2 for “Business Continuity and Transition Plans.”

DISASTER PREPARATION

After finding that many RIA firms were not well prepared in the aftermath of Hurricanes Katrina and Sandy, the SEC released alerts that practice owners should more closely review their disaster preparedness and continuity plans. Many of the new requirements under the proposed rules were to address shortfalls that were identified by these events in actual practice. Unfortunately, that guidance appears to be ignored by many whether through frustration, inability, or otherwise. Add to this, as FP Transitions has often pointed out, the substantial lack of Continuity Planning (death or disability planning) in our aging industry, and you have a perfect storm for regulatory intervention.

The Proposed SEC Rule 206(4)-4 and the amendments to Rule 204-2 are stepping in to address these apparent short falls in preparedness. Although many of these new regulations are considered within requirements that have long been in place for Business Continuity and Disaster Recovery under SEC Rule 38-1a and FINRA rule 4370, there are significant new requirements that are part of the language in the proposed rules and rule changes. Some of the highlights include:

After Laurie Nichols out of her business four years ago - a transition that took her on a personal goal-setting journey (read about it in her first guest post here)- she was able to look back on the importance of planning ahead for a successful exit and future for herself and her business.

Over the years, as my partners and I grew our business, opportunities to monetize seemed to crop up regularly. We figured we had time though and relaxed into our comfortable position on the fence certain of a “someday score”–we thought there’d always be someone eager to buy and we’d be set.

We had no dates, no planning tasks, no target successor profile. We coasted on autopilot and didn’t really think much about someday–except the occasional fantasy about the cash out sure to come.

Wake up

Then, about 10 years ago, the wake up calls started and we realized someday was upon us with no “score” in sight. As I look back on my transformation from shareholder to seller, three particular wake up calls stand out as crossroads that could have easily been ignored.

In the M&A space for the financial services industry, everyone wants to acquire. Few advisors, however, take the time to sit back and think about what they want from the acquisition: what kinds of clients and assets would complement the existing business, what new staff and advisors are required to run a larger book of business, and what will the new business look like post transition.

In our experience, the advisors who are most strategic are the most successful.

Michael Lutz of Legacy Financial Strategies in Overland Park, KS understood that acquisition was a viable and smart path for growing his business. He wasn’t just looking to gobble up as many practices as he could, however, because he also understood that if he chose his targets strategically, he could not only grow his business but he could ensure its legacy by using acquisition as a vehicle to recruit Generation Two talent to his firm.

Using FP Transitions Enterprise Consulting to develop and execute his internal succession plans, Michael offered equity, and with it a modicum of control, to recruit smaller advisors with existing books–and new advisors without–to Legacy Financial Strategies and created his “growth machine”. These mergers and additions increased the value of what they all now own and are committed to continue building.

With the right strategy, instead of just acquiring clients and assets, a “growth machine” is created, and the foundation for future growth is built with succession through acquisition.

Watch Michael’s story below.

The 4-year anniversary of the sale of my financial advisory business is rapidly approaching. 

The memories from 30 years spent in the financial services world, including 20 as a managing partner, haven’t completely faded yet. But the time away has allowed for a fresher perspective on the journey that brought me to where I am today.

It feels pretty amazing reporting from the other side of selling a business in the investment world. There are a blend of emotions—gratitude, energy, purpose and, most importantly, happiness.

I didn’t always feel this way.

Ownership Decisions

Being one of three shareholders in a “boutique” firm was like riding a roller coaster—at times completely exhilarating, and at others, totally terrifying.

We had the usual business challenges—market volatility, staffing issues, compliance rules, fee pressures. Fortunately, the successes we achieved far outweighed these challenges.

As the years ticked by, our commitment to making decisions that would ultimately benefit us when it came time for succession paid off. All the usual processes that are part of a sale were relatively (and fortunately) uneventful—due diligence review, operational preparation, deal structure, and transition. 

The Internal Struggle

What took me most by surprise was the internal tug of war; the mental and emotional in-fighting I started to experience. My self-doubts and fears kicked into overdrive. Why was this so hard? This is what we had all agreed we wanted, right? What if the clients are upset? What if I don’t like it?