Our world has turned upside down over the last few months. Markets experienced widespread volatility not seen since the financial crisis of 2008. It was challenging enough to serve as both a wealth manager and entrepreneur pre-crisis, but recent events have thrown a monkey wrench into the balancing act.
One ripple effect is that proactive planners are thinking more seriously about their next moves—whether that’s selling all or a portion of their business and taking “some chips off the table,” or retiring from the profession altogether. This has been a significant challenge for our industry for quite some time. But with only 11 percent of wealth management professionals under age 40 (according to the J.D. Power 2019 U.S. Financial Advisor Satisfaction Study), it’s time we start talking seriously about this.
I know firsthand what it’s like to step away from a business you’ve worked your entire career to build. I sold my firm, Fusion Advisor Network, to Kestra Financial in 2012 and have remained actively involved in the business as chairman emeritus because I love what I do. I also wanted to make sure my clients and employees were well taken care of and the legacy I created lived on in perpetuity the same way I envisioned when I initially launched the company.
Today, in my work actively guiding entrepreneurial RIAs and wealth managers through the same process with Bluespring Wealth Partners, a firm I run that buys and invests in successful RIAs and wealth management businesses.
There are challenges to the succession planning process and now even more so with a public health crisis on top of it. Here are three steps to navigate the playing field:
1.) Get Serious About Finding a Successor
If you’re thinking about handing over the reins to a junior partner or staff member, you need to start identifying and training that person as soon as possible. This is one of the most difficult tasks in the succession planning process and one that I challenge the profession to think about differently as we move forward.
There’s often an unrealistic expectation that when we hire a younger team member in their 20s or 30s, they will intuitively understand how to run a business like you do. It’s crucial to identify the right G2 (second generation) successor who has the potential to learn from you and ultimately play a role in your succession plan. The reality is we need to start early to groom and mentor the next generation and teach them everything we have learned over the years so they can eventually excel on their own accord. That may be a lot to ask of the older generation of G1 founders, but the time and effort invested will pay huge dividends in the long run.
2.) Consider Institutional Capital Needs
Another challenge when stepping away from your business is finding a prospective successor who has the capital to buy your business or the willingness to take on a personal loan. It’s a situation we observe frequently, but there are solutions available that may require out-of-the-box thinking and creative ways of bringing in institutional capital or specialized lenders.
One of the biggest mistakes I’ve seen in this scenario is when the successor, or G2, offers to pay G1 for the business in increments over time. While this makes sense in some cases and may be worthy of consideration for a portion of the purchase price, there is a huge risk this could backfire if the firm doesn’t optimally perform or the market experiences a substantial downturn. Many founders also see this as an unfair option, as the successor is essentially offering to buy the business with the founder’s money as they would be making payments using the cash flow of the business itself and not out of their own pocket.
3.) Don’t Get Discouraged by the Psychology of Change
It’s human nature to neglect something that isn’t sitting in plain view. This is very much the case with succession planning, and by the time most planners realize they need to take action, it’s too late. The psychology of change usually requires giving up control and delegating, yet many founders find this hard to do, as they built the business from scratch and think they can do most of the jobs better than their employees. While in some situations this may be true, they need to step back and let their team learn from experience and from their mistakes (just as they did). It’s the best way to train, let go and create true value in a firm.
When I started Fusion Advisor Network, I wore every hat in the business and much of the client interaction and value was based on me, and my face-to-face consulting time and personal relationships with clients. Eventually, I realized that if I wanted the business to have serious long-term value, it had to operate independently and its value proposition and client growth had to be based on a team approach, not on my individual efforts. A business has true value when it’s not dependent on one person and when a founder can step away and demonstrate that the business continues to generate growth, consistency and profitability. Of course, giving up control means things won’t always be perfect, but more often than not any minor missteps won’t be noticeable to your clients.
Five Ways to Get the Ball Rolling on Succession
Though COVID-19 has rallied some firm owners to start this process, there could be lingering hesitations due to the daunting task of handing over control. If you start to take succession as seriously as you take planning for your clients’ futures, everyone wins because clients ultimately get better service and the business itself continues to grow. Here are five ways to get the ball rolling:
- Consider how much longer you see yourself involved in the business, and to what extent.
- Ask yourself if there’s someone internally who could potentially take your place. If not, it may be time to recruit new talent or seek additional external solutions.
- Consult your peers in the industry who may have faced similar challenges.
- Keep an open mind about potential succession strategies. There is no one-size-fits-all solution.
- Don’t wait too long, as transitions can take time and you want to do it the right way in order to maximize the value you get while ensuring that your legacy lives on and your clients and staff are well taken care of.
Like any other investment, it will take time, but will be worth it in the end.
Stuart Silverman is President of Bluespring Wealth Partners. A consummate entrepreneur, Silverman has successfully developed and sold four different businesses. In 2003, he founded the Fusion Advisor Network, a practice management and business-consulting network that managed close to $10 billion in assets.