by Cynthia Harrington
Succession planning is becoming a driving force in the advisory profession.
Half of the accounting profession is facing the issue today - more than 50 percent of partners are over 50, and more than 30 percent are over 55 years of age. The aging of business owners and the personal nature of the business make succession for advisors similar to that for accounting practices.
One fundamental aspect of the successful exit strategy is the smooth transition of the client relationship, but that transition doesn’t happen overnight.
Mitch Freedman, CPA, PFS, started a year and a half ago to focus clients’ attention away from him and onto the MFAC Financial Advisors Inc. team working on the clients’ accounts. “This is a big change from the early days, when it was build, build, build,” says the Sherman Oaks, Calif.-based Freedman. “Then I wanted them to think about working with Mitch Freedman, and now I want them to see their team. It must be working, because clients have quit calling me on questions that other experts on their team should be answering.”
Freedman has no current plans to sell the practice, but he is motivated by having clients continue to receive a high level of independent advice and service. “In order to grow the firm and grow assets under management I have to let some things go,” says Freedman. “But maybe 10 years down the road I might want to slow down a bit, and the firm is ready for me to be able to do that.”
While most advisors wish to choose the timing of their exit, many feel a need to plan for unexpected events. Freedman started his firm in 1981, and prospective clients sometimes ask for a backup plan if something were to happen to him. In addition to the team approach, he established a relationship with a network of advisors who step in to help, if needed.
An unexpected event sparked the succession strategy for Quest Capital Management in Dallas. Three years ago, one of the two shareholders holding 80 percent of the company had a heart attack. That started the other 10 planners thinking about what they would do if something happened to one of the major shareholders. “The first step we took was to look internally at our structure and culture,” says Carl Kunhardt, CFP. “We saw we needed to change our paradigm from individual group practices sharing services to a whole firm consciousness.”
Quest made the transition in two steps. The first was the same as Freedman’s. “We shifted the culture from that of a focus on the sole provider to focusing on a team of three or four people,” says Kunhardt. “We got rid of using the word ‘I’ in any communications and replace it with ‘we.’”
The next shift was to take personalities out of the relationship entirely by assigning a backup team and emphasizing that the client retained Quest as their financial planner, not the staff of Quest. They explained to clients that the primary team might be unavailable or take a vacation, and that Quest wanted to ensure constant service.
The secondary team’s name appears on the front of the annual plan updates. Team members drop by for a few minutes in the annual client review meetings. “The shift seems very well received, judging by the comments we get in our client surveys,” says Kunhardt.
The level of transition from personal relationship to relationship with the firm is what drives the price of deals on the open market. “Acquirers in 1999 and 2000 paid cash upfront,” says Allan Koltin, president and CEO of PDI Global Inc., a Chicago-based consultant to professional and financial services firms. “Now the terms of the deal are more a function of how serious the advisor was about selling and what the advisor had done previously to leverage himself internally and institutionalize the client relationship.”
Shifting the client loyalty is also key in transactions. Acquirers today will pay some cash upfront for good firms, but make some of the payment contingent on client retention. “Sellers are staying around for a couple of years as part of the deal,” says Koltin. “My advice is that the time to start the client transition is the day the client engages the firm. Firms can’t undo 20 years of client thinking overnight.”
The ultimate test of Quest’s succession strategy hit the firm last year when Glenda Kemple, one of the two major shareholders, announced her desire to leave. Internal negotiations took up the fall, and the move was announced to clients in January with an effective date of April 2003. “By the time she was ready to leave, clients had been expecting it,” says Kunhardt. “They really didn’t notice that she was gone.”
Not all advisors are looking for the exits. Freedman credits his desire to stay put to his associations with dynamic older individuals who created wonderfully fulfilling autumns and winters of their lives. “I love what I do and I’m continually challenged,” says Freedman. “No one is forcing a retirement age on me, nor is anyone telling me how many chargeable hours are required. I’ve got as much time as I want now to work on charitable activities and work on behalf of the profession. I expect to work until the end.”
One CPA considers her financial planning work to be her retirement. Ginita Wall, CPA, CFP, sold her New Mexico-based accounting practice in 1986. To honor the terms of a non-compete clause she moved to San Diego to begin a financial planning practice. While she spent six months traveling back to meet clients and talking with them a couple times a week on the phone, she had started on the new phase.
“In a way, we had built for a successful transition a couple of years before the sale,” says Wall. “We graded clients A, B and C, and shifted the B and C clients to staff. The acquirer got my partner and our staff for two years, so the client loyalty stayed with them.”
Now she provides independent personal financial advice for an hourly fee. She specializes in divorce and other life transitions, writing books and speaking on the topic. “I’m not thinking about succession now. I want to keep this personal relationship with my clients,” she says. “Now, I’m planning to work until I can’t anymore. Then I’ll just shut the door.”
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