Much has been written lately about the aging of individuals who own RIA firms and the lack of succession planning that has been done by this group. At 58, I am the poster child for this group of owners and my partners and I at Pinnacle Advisory Group are working on this very issue. Now sensitive to the problem, we are not only realizing how important the solution is for the future success of the firm, but also how difficult it can be not just for large firms like our own, but even more so for smaller firms with fewer options. Today I wanted to share with you what we are learning and offer a practical new continuity planning solution.
Our Path to an Effective Continuity Plan
I am fortunate to have two trusted senior partners that will purchase my interest if I die or become disabled. We are still working through the final details of our living succession plan although one option is included with the current buy-sell agreement. We began adding minority partners over 10 years ago and we are now up to 4. While the amount of equity we have sold is very small thus far, our plan is to accelerate the sale of equity to key people in the firm starting within the next six months.
Most of the case work and analysis suggests that internal buyouts like ours work most effectively for buyers and sellers, but let’s face it, as long as our firms grow profitably and as long as we enjoy being engaged, there is usually a significant financial advantage to maintaining a majority equity position.
It is not surprising then, that advisors tend to procrastinate on continuity planning until there is motivation to spend the time and energy on the problem: i.e., when a partner is contemplating retirement; or employees clamor for ownership; or when partners recognize that broader ownership will enhance employee commitment and engagement in the firm. There is, of course, the one in a hundred shot that a strategic buyer will offer an outrageous sum for your firm and ask you to immediately ride off into the sunset, but “don’t hold your breath”.
Smaller Firms Face a Greater Challenge
Smaller firms with only one owner face an even greater challenge in establishing a continuity and succession plan – and these firms far outnumber large multi-partner firms like our own. Why? First, without partners, there is no natural buyer in the event of death, disability or retirement. Second, unless the firm is blessed with multiple suitors at just the right time, it cannot negotiate from strength. That is especially the case in the event of death or disability because there is no one familiar with the business remaining to negotiate a sale and manage a transition. Instead, a surviving spouse or family member is thrown into unfamiliar territory negotiating the sale of a business they know nothing about; and clients are left facing the same uncertain decision they faced years ago when they chose you as their financial advisor. Will the new owner do a satisfactory job? Do I need to find someone else? How do I know who is right?
A Practical New Continuity Planning Solution
Our own practical experience with continuity planning and the innumerable conversations we have had with advisors about their businesses in the context of Pinnacle Advisor Solutions, told us that a better continuity planning solution was needed in the community. We decided to tackle the problem. We developed a unique new solution designed to (a) provide your loved ones a fair value for your firm upon death, disability or voluntary retirement and (b) a seamless continuity plan for clients while (c) allowing the advisor maximum flexibility and control by making the transaction structure revocable at any time. Simple, fair, flexible … and perhaps the only option outside of insurance or outright sale to receive compensation for your life’s work.
You have been encouraged to think about succession planning by many experts in our field. I am encouraging you to take the first step and really think about an action plan with a timetable. If you are a sole practitioner, I suggest you further explore the Pinnacle Continuity Plan. As an aside, we will talk with you about a lifetime buyout if you are considering your options.