TRANSITION TALK

Looking back over the past few decades, you can easily spot the trends and physical changes in our industry. Since 2000, when FP Transitions formally opened its doors, I’ve seen our profession, especially in those working under an independent broker-dealer or hybrid model, steadily shift to fee and advice-based solutions. Early on, most practices that we represented were made up primarily of transaction or non-recurring revenue; today advisors build businesses with a focus on fee-based income streams. Independent insurance companies are evolving as well with a sophisticated and wide array of recurring revenue.

Along the way, these practices have become not just more valuable, they are also physically larger and stronger. This requires more qualified people to analyze, give advice, produce revenue, as well as the adjunct talent to support these professionals. Looking forward, we see an ever increasing need to recruit and retain the best talent in the industry to support not just where your practice is today, but where that growing business will be ten years from now. Everyone has read about the need for recruiting; but the story has shifted in the past few years and will continue to do so going forward. Rather than simply hiring next gen talent as the need arises, this could well turn into a fierce competition to adequately reward and retain that talent as more and more advisory businesses reach the next level of success and draw upon a talent pool that has scarcity written all over it. 

Business succession from parent to child is an age-old practice in human history, from humble cobblers to royal families. The practice stemmed from necessity—parents taught their children the trade they knew in an effort to teach them to survive. What started from necessity became custom and, eventually, tradition. In many professions, this tradition is still a point of pride. Advisory business owners will often see this as the best path to build an enduring practice and retain their client base.

For some advisors, the idea of passing the business to a family member is their preferred choice and seems to be the easiest path forward. One day, the founder steps out and the child steps in. Most advisors even consider gifting their business to their children, with or without a written contract, rather than selling it to them. Here are some simple reasons you should think twice before taking this route.

The IRS Considers Your Business to Have Value

Many advisors think, “I’ll just give my children the business when I’m ready to retire.” We hear this all the time from founding owners whose children work with them in their business. Be wary, though – although certain types of gifts are exempt from this rule, generally speaking, a gift whose value exceeds the annual exclusion is taxable to the giver of the gift and likely will be applied against the giver’s lifetime estate tax exemption. 

In many professions and in most businesses, succession planning and sustainability are not pressing issues. Most people don’t need a multi-generational dentist office, for instance. Who really cares if the neighborhood hamburger stand or your favorite restaurant has a succession plan? But in the financial services and wealth management industry it’s different.

Advisory clients have a clear–and not unreasonable–expectation of receiving continuing advice and investment management tailored to the length of their lives, not to the length of their advisor’s career. Being an independent financial professional necessarily indicates a commitment to the future; the element of planning implies that a financial advisor is starting something that will not and should not end with his or her own career. 

Consider the average successful financial advisor is in his or her mid-50’s. At that age, the owner/advisor will likely continue to work for another 15 to 20 years, even as time in the office gradually diminishes over the last half of that plan. At this time, clients are transitioning into retirement and are likely to need more financial guidance, not less. The term “succession gap” refers to the time difference between a single financial advisor’s career length and a client’s wealth cycle.

Working at a financial services firm can be a rewarding choice for the next generation of advisors. You can have real impact in people’s lives as you help clients set their financial goals and see them succeed over time. It is an environment where there is constant change and continued opportunities for learning. And, the financial services industry offers a lot of choice in terms of specialization, type of firm and location. It is important to find the right company and team to work with to put your career on the right path.

During a job interview with a potential firm you will have the opportunity to ask your own questions about the business and the team. Asking the right questions shows you are intelligent and engaged, in addition to providing you with critical information to help you make the right choice for your career.

You will, of course, have questions to ask specific to your own goals and concerns, but here are three relevant to every advisor's career that should be on your list:

DENVER - The Financial Planning Association® (FPA®) is pleased to announce that FP Transitions is now FPA’s “Official Partner of the Next Generation of Financial Planners” in an effort to support young professionals on their career journeys in the financial planning profession.

This new partnership will leverage FP Transitions’ experience and thought leadership for the benefit of young professionals and financial planning firms looking to build plans for the eventual transition of firm ownership. With thousands of young Certified Financial Planner™ (CFP®) professionals among its member base and a vibrant NexGen community, there is an opportunity to help support members and firms that desire to establish an effective, efficient succession plan. 

“We are pleased to have FP Transitions join FPA as a key partner in supporting our members and their desire for a seamless transition of their firms to the next generation of firm owners,” says FPA CEO/Executive Director Lauren M. Schadle, CAE. “Their support and contributions will directly benefit our members by providing the necessary knowledge and resources to help our young members become firm owners.”

FP Transitions has developed strategies to solve the succession problem for owners of financial planning practices; the next step in supporting the founders cultivating the next generation.

“We’ve worked with RIAs expanding ownership to 20 new partners, father-daughter teams, and everything in between,” says Brad Bueermann, CEO of FP Transitions. “We designed the strategies and solved the financing issue, now the last thing is building the talent. Over two-thirds of our succession clients have executed their plan, transforming over 700 next generation planners into business owners. The greatest challenge for owners of successful financial planning firms is finding qualified next generation leadership. We want to make sure professionals entering the industry understand this opportunity and are prepared to act on it. Partnering with FPA was a natural decision to deliver that message.”

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.

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.

Founding (G1) advisors are asking the wrong question: “How do I hire and retain employees with an entrepreneurial mind-set?” It should be, “How do I attract and retain employees with the skills and expertise to take my business to the next level?”