Next Generation Planner: April 2022
Brooklyn H. Brock, CFP®, CEPA, ChFC, CKA
Founder, Ellevate Advisors
www.linkedin.com/in/brooklynbrock/
Brooklyn Brock, CFP®, CEPA, ChFC, CKA, is a third-generation financial adviser and founder of Ellevate Advisors LLC, the only advisory firm in the world that specializes in financial planning and exit coaching for financial advisers. Throughout her career, she found advisers rarely do financial planning or retirement planning for themselves like they do for their clients, which drove her to launch her own firm to serve advisers exclusively. She was a winner in Oklahoma’s 2021 NextGen Under 30 program in Finance and travels across the nation as a speaker and educator, sharing her passion of helping advisers themselves.
This article is for the next generation of advisers who have ever considered, or even attempted, buying into an advisory firm or becoming an adviser’s successor. Succession planning hinges on three foundational areas: (1) open communication, (2) trust and respect, and (3) the succession timeline. Below are three questions per each criterion to help you evaluate the likelihood of succeeding in a current succession plan, or identify when saying “no” to a succession plan could actually be the right decision.
Open Communication
Open communication is the first foundational area to assess when working toward a succession plan. Succession planning as a project is emotionally sensitive and one of the most important projects a business owner completes. Below are three questions for you to consider about the selling adviser to identify and resolve communication issues and improve the succession plan.
- Is the adviser comfortable talking about their succession plan? You may hear some advisers talk about their succession plan frequently and openly, but completely change the direction of the succession plan upon a whim. If an adviser openly shares their succession plan strategy without making frequent changes, this is a good sign. However, many traditional, mature advisers adopt a business management style of “keeping their cards close to their chest.” This means not sharing anything, or not sharing their honest thoughts and opinions. Often, they will only feel comfortable opening up to a third party, like another adviser who is looking to sell or an exit coach or business coach. You may have been told that you will be a part of the succession plan “someday” and yet that day never comes. If you’ve been in that holding pattern for several years, consider engaging with the adviser to contact those third parties.
- Is the adviser comfortable talking about your career track leading to partnership and succession? Advisory firm owners often struggle to find time to build an intentional career track for employees, hold regular performance reviews, or provide a list of requirements for associate advisers to be considered for partnership. If so, this is an opportunity. If the adviser is willing to work with you to outline these things, it will open the door to a succession plan eventually. It’s also a great exercise to help potential successors develop an ownership mentality. However, once these are created, the selling adviser must follow them and stick to them for the succession plan to become a reality. The best firms establish a leadership team or ownership onboarding process. Becoming a part owner or successor involves assuming additional responsibilities for managing the firm and making leadership decisions. If the transition happens too quickly, or if it’s not designed intentionally, the succession plan may fail.
- Is the adviser comfortable sharing business information? Some advisers are happy to share the financial statements, legal documents, and valuations for the business because they want to help you develop an ownership mentality, and they know they can’t pull this succession plan off without help. An adviser who is unwilling to share business information may see you as an adversary. They may view you as someone to negotiate against to get the highest value for their firm, or as someone who still needs to prove their skills in business management or client acquisition before they’re ready to discuss ownership. If you can identify information that is missing, you can work to meet owners’ expectations. However, if you don’t see significant change over the long run, the succession plan is not likely to happen, even if the seller keeps saying that’s what they want.
Trust and Respect
If there is a lack of mutual trust and respect before the succession plan begins, it’s likely to get worse from there. Below are three questions to help you identify when trust and respect are present or absent in the succession plan.
- Does the adviser respect your education, professional experience, and personal values? The adviser may say good things about you, but do they highlight your strengths and skills from the perspective of what the client or vendor values? An adviser who praises or over-praises your skills in a current or previous position may have mentally placed you in that position and isn’t willing to let you advance easily, if at all. You may want to craft a two- to three-sentence bio of the things you think the adviser should highlight. Another sign of a lack of trust or respect is when an adviser talks positively to clients but doesn’t demonstrate that same positive attitude outside of client meetings. Some advisers make comments that can reveal a lack of trust and respect. You must watch for these comments in person and over email. Examples include comments about how expensive you are as an employee, your appearance or your office space, your availability to work or the reason behind your availability, and jokes at your expense.
- Does the adviser trust you to provide good service and bring in new clients? Providing good service to existing clients often isn’t enough to become a successor. Sellers recognize that for their firm to continue, you must be able to bring in new clients. Most firms are open to helping you identify sales training programs, shadow more-experienced advisers on sales calls, or work with the firm to launch your own sales initiatives with their approval. It often takes trying several sales initiatives over a few years to see what works and what type of sales you like doing.
- Do you trust and respect the adviser personally and professionally? If you’re a young, “hungry” adviser, you may pursue succession planning for the financial benefits. You may expect to earn the seller’s trust and respect over time, or expect the succession plan to be successful even if you don’t trust or respect the seller. However, that’s often not the case in real life. A negative firm culture or negative buyer–seller relationship becomes magnified during the succession plan. Internal succession plans often take 10 years or longer. Don’t underestimate the toll a negative work environment can have on your mental, physical, and relational health over that time. A lack of foundational trust and respect is a sign to revisit your personal values and career goals, and chart the career path that’s right for you and your personal life going forward.
The Succession Timeline
You and the seller will likely have differing expectations on how long each stage of the succession plan will take. Below are three questions to help discern if you and the selling adviser share the same succession timeline.
- Is the adviser looking forward to retirement? There are three areas of retirement readiness to look for in a seller. First is personal readiness. If an adviser does not have interests outside of work, and does not have strong friend or family relationships, they will not be able to successfully retire. The retired seller will continually “boomerang” back to the business, looking for meaning and purpose.
Second is financial readiness. Unfortunately, our industry does not have a history of “practicing what we preach,” meaning sellers likely have not updated their own financial plan or hired their own financial planner. The average adviser does not know how much they need to have saved for retirement or how much they need to get from selling their business to be able to afford to retire. If you think the seller is struggling with this, you may gently suggest that the adviser hire their own financial adviser to provide accountability for identifying their values, setting post-retirement goals, and projecting the funding needed to retire successfully. Sellers are more open to this idea if they are doing it to reassure their spouse or partner that they can afford to retire. When you recommend financial planning to the seller, it’s likely also a good time for you to do the same. You may find it helpful to get an objective strategy on the best way to pay for the advisory firm and understand how you and your family’s personal life and financial goals will be impacted over the long run by committing to this acquisition. It’s also an opportunity to determine if this acquisition is reasonable from your perspective by calculating at what point you “break even,” what your profit margins will be during the payment term and thereafter, etc.
Third is business readiness, which is covered in the next section.
- Is the adviser open to changing business operations and delegating their work? If the adviser can define what they do not do and successfully delegate that work, they will likely be able to let go of their business. Ideally, they can define their role and responsibilities objectively to facilitate your replacing them in the future. Some advisers, especially solo advisers, struggle to relinquish control. Similarly, some advisers view their business as their “baby.” They may protest that you don’t have their baby’s best interests at heart, or that you wouldn’t take care of their baby the way they would. This isn’t wrong—you will have your own vision for the future of the business. Other advisers struggle with the power dynamic of the ownership mentality. They may feel that you are challenging them. Some selling advisers struggle with these mindsets so much that succession planning may not be feasible until they work through it all with an objective third party, like a business coach, exit coach, or their own financial adviser.
- Has a recent business valuation been completed? Advisers who are serious about exiting their business in the next few years will proactively get a business valuation completed. However, most advisers often stall on taking any action toward their succession plan for several reasons. They have grown a business that produces good income and requires much less work than it did when they started years ago. Advisers are tempted to delay selling the business because they like or need the income. And selling means work. Many advisers literally plan to die at their desks because that’s easier for them. This is especially true if they are past the age where they could successfully transition into retirement or enjoy their “second half” of life. You may find yourself left with the only option of waiting till the adviser dies. This can be especially painful if you have ideas on how to improve the business or better serve clients, but must wait for the adviser to die before doing that type of work. If the seller is not open to change, you must ask yourself if it’s personally and financially worth the wait.
Advisers are most motivated to work on their succession plan when they—and their spouse or partner—are looking forward to retirement, personally and financially. They must feel that it’s the right thing to do for their clients, or that it is their fiduciary duty to their clients. And they need a natural, trusted successor with the right education and experience, who can maintain and grow the firm, and whose interests align with the adviser’s interests at the right time.
You may feel like the selling adviser holds all the power. However, we have identified many discussion topics and exercises here, which are tools to support the adviser in crafting a successful succession plan. Working with exit planning experts and coaches can close the succession planning gap, but only when the selling adviser is open to working with a third party and is involved in those conversations from the beginning. If you and the seller can’t work out your differences together, or with a third party, it’s possible that it’s not the right fit. Saying “no” to a succession plan is a difficult decision, but it can often lead to opportunities that are a better fit for both you and the seller.
