July 2017: 10 Questions

Journal of Financial Planning: July 2017


Tim Kochis on Succession Success, Distributing Ownership, and How to Grow an RIA


WHO: Tim Kochis, CFP®

WHAT: CEO of Kochis Global; succession planning expert; author; thought leader

WHAT'S ON HIS MIND: “One of the big risks of a founder/CEO sticking around too long is that they, in fact, diminish the value of what they’ve created.”

Tim Kochis has arguably been one of the most successful financial planners in the profession, considering his acumen for growing planning firms, merging them, and succeeding from them. So it may surprise readers to learn that his first piece of advice for independent RIAs that may be struggling to grow is “get lucky.”

“Luck has something to do with all of this—being in the right place at the right time, being in a robust economic environment at a time when the economy is growing and the investment markets are performing well,” Kochis said.

Of course, you can’t make luck, but there are ways to make yourself luckier, he said. And those things include choosing your market niche and geography well, then serving clients very well.

And when it comes time to move on from the practice, make it so—as a founder, don’t stick around too long or you could actually diminish the value of what you’ve created.

Kochis sat down recently with the Journal to talk about succession planning, the importance of distinguishing management from ownership, his global perspective, and his passion for improving financial literacy among all populations.

1. What do you think is the most common thing holding firm owners back from achieving a successful succession?

The biggest hurdle is an emotional one. I think everyone who comments on this topic comes to the same conclusion that the emotional impact for the founder/CEO is very, very high. There is almost an identity between these firms and their founders. These firms were founded 20, 30, 40 years ago by people who were very risk-tolerant. Through their hard work, the hard work of others, and some luck, they have built successful firms; it’s difficult for them not to see the firm as their personal creation.

While this is the biggest stumbling block to actually making a successful transition, it’s not the only one. The others are the operational readiness of the firm for a transition, and then the financial terms have to be acceptable to all the parties. It can’t be one-sided.

Obviously, the money aspect helps to overcome some of the emotional barrier. It can soften some of the psychological blow.

What founders often don’t realize is that it’s an emotional proposition for the successors as well. Successors wonder whether they’ll be able to continue the success. They wonder whether they will bring the same entrepreneurial charisma to the firm. Now that the firm is established and has recognizable value, they wonder whether they will be able to turn their investment in it into something that is, for them, eventually very rewarding. They are not starting at zero; that is both a benefit and a potential problem.

Once founders really appreciate that emotional toll for the successors as well, it easier for the founders to come to grips with their own emotional impact.

2. What happens if a founder sticks around too long? What’s the downside of that?

None of us are infallible; none of us are going to live forever. Someone can stay beyond the point at which they are being truly effective as a leader. They may not have the energy any longer; they may not have the same mental acuity they once did.

So, if they stick around too long they can damage the firm in two ways: one, by failing to meet the clients’ service expectations; and two, by failing to provide career opportunities for the other people within the firm. One of the big risks of a founder/CEO sticking around too long is that they, in fact, diminish the value of what they’ve created.

Graphically, there is a point at which the value increases, and then maybe plateaus, and then maybe declines. Firms need some new energy, some new talent being brought into the picture to keep that growth and value trajectory moving upward.

3. Can you talk a little bit about the importance of the separation of management from ownership?

The importance of distinguishing management from ownership is that it permits founder/CEOs, or maybe sole owners, to distribute and begin to shed some of their ownership interest without necessarily relinquishing control, because the real emotional impact here is not about ownership; it’s much more about control. Usually, by the time this issue comes up, the founder has already made enough money or has been earning enough that maximizing the economic impact is not the most important issue. What is important to many people is control—the ability to make the really important decisions about the firm.

One of the ways to do this is to separate control authority from ownership stake and make the distribution of equity something that can take place without simultaneously or proportionally relinquishing control. For example, all owners can have the right to participate, through the size of their ownership stake, in some major decisions, like whether the firm should merge with another firm, or whether the firm should acquire another firm, or whether the firm should change the nature of its business, or open a new office in another city.

For those really heavy-weight, strategic decisions, maybe you have all the owners voting their ownership weight. But for perhaps many years, the ownership weights are going to rest primarily with the founder, and so the founder doesn’t even have to worry too much about relinquishing control over even those major decisions. In the meantime, however, the founder/CEO can have a typical CEO mandate to manage the business regarding everything else below those major strategic levels and not to have to accept the advice or the second-guessing of every owner, just because they’re an owner.

The owners get to decide certain things; they don’t get to decide everything. This is a really important distinction to make, and once you get your head around it, “Oh, yeah, I can make that distinction,” then it’s relatively easy to start distributing equity or ownership in the firm, maybe many years before transitioning the control authority.

This has two big benefits: one, it is a demonstration of confidence in the other people within the firm being given the opportunity to acquire equity; and two, it allows the value transaction to take place early, when it’s more affordable for the new owners. This gives the new owners an opportunity to reap benefits early, a proportional share of the net profits of the firm, so that they can begin to accumulate wealth, which will permit them to buy out more and more of the founder over time. It becomes a very virtuous cycle.

4. Your former firm, Aspiriant, has more than 60 owners. Why have such a broadly distributed ownership base?

I stepped away from any management responsibilities or authority there in 2012, but I continue to be an owner—I’m one of those 60-plus. I have awareness of the big picture at the firm, but I’m not involved, at all, in the day-to-day.

What I can tell you is that this is part of the leadership brand that we always wanted to occupy. We want to be seen by the industry as the leading independent wealth management firm. We want to lead in many respects, and this is one of them.

We demonstrate leadership by broadly distributing firm ownership for a couple reasons: to align the interests of the firm’s owners with the interests of clients, as opposed to having a third-party owner somewhere like a bank or a consolidator. Nothing like that occurs at Aspiriant, and all the people who own Aspiriant are current operators within the firm. I’m the only exception at the moment, but I was an operator and CEO for many years; I’m very far from being a “third party.”

So, it aligns the ownership of the firm with the interests of the clients, and, secondly, it creates a large internal market of smaller, younger owners for the ownership interests that are sold by the larger/older owners as they retire, or merely decide to liquidate some of the value that they have owned. There’s now a large market of people who have an appetite to buy those shares.

5. Your original firm, Kochis Fitz, experienced impressive growth in number of clients, assets, and employees. What advice do you have, particularly for independent RIAs, that may be struggling to grow?

The first piece of advice is to get lucky. Luck has something to do with all of this—being in the right place at the right time, being in a robust economic environment at a time when the economy is growing and the investment markets are performing well.

There’s no way that you can make luck, but you can help yourself be luckier than you might otherwise be by choosing your geography well, by choosing your market niche well. There are some market niches that are likely to grow better than others. So give yourself a good chance to be lucky.

Then, serve your clients very well, because one of the strongest sources, by far, of client referrals is your existing clientele. Serve them well and let them know that you’re happy to have their referrals. In that context, be prepared for the reticence that some clients will have about not wanting the firm to get so big that you can’t continue to serve them at the level that they’ve become accustomed to. That’s the big fear, so anticipate that reluctance and get in front of it. Explain to clients: I want our client service to be replicable whether I’m here to do it or not, and we promise you that we will staff appropriately to respond to the growth that we hope for. The idea is to grow the business so that it continues to be able to serve you, and your children, and your grandchildren.

6. Is there a trade-off to rapid, robust growth? If so, what is it?

First, good growth doesn’t have to be rapid. A consistent pace of growth may be the nirvana. And yes, of course there is a trade-off—service quality could deteriorate. That’s what sometimes keeps existing clients from making referrals. Clients have to believe that you are staffing for growth and investing in efficiencies like technology and best practices and service enhancements.

And, growing relatively slowly may be better than trying to grow in fits and starts and trying to take on too many clients without adequate capacity to serve them really well. If you get a new client and you have to say, “Now sit back; we’ll get to you in six months,” that is not going to be helpful to your growth strategy.

7. Early in your career, you were doing personal financial planning at two large institutions (Deloitte and Bank of America). What did you learn from those experiences that may have helped you later find success with your own independent firm?

One thing is that I was able to cultivate clients who we served well and who thus developed a personal relationship and loyalty to me and my colleagues. As we left Bank of America, we took many clients with us. As we left Deloitte, we also took many clients with us. It might have been important to clients that we were part of B of A or Deloitte at the outset, but once we started delivering, what was important to clients was us.

We had the opportunity to hone the service offering and make it better. We developed institutional-quality services at these large firms and then took that into our own private undertaking.

8. Kochis Global helps planning firms and individuals in developing markets become successful. Where does this passion for what’s happening globally come from, and what role does planning outside the U.S. play in the future of the financial planning profession?

I’ve travelled a lot around the world, and I’ve always thought of myself as a global citizen. The world is a big place. If you travel and see the things that are different and the things that are the same, you develop a perspective that is itself global.

When the CFP Board owned the international CFP® marks, there was an entity called the International CFP Council, and I was involved with that for a number of years. In 1996, as I was leaving the CFP Board [after serving as chair of the Board of Examiners, and president of CFP Board], I was asked to present a master plan about how the CFP® credential could be internationalized. That was part of the foundation for the FPSB [Financial Planning Standards Board] and I was invited to come back onto the FPSB Board. I served on that board twice now and I was its chair in 2005.

So, this has been a long, cumulative process of seeing the development of the financial planning credential overseas and helping to institutionalize it globally. I think my most significant personal thrill in that regard was in helping China come to grips with getting the CFP® credential established correctly and assisting China to be admitted to the international family of CFP® certification. And now, China has the largest number of people with some level of CFP® certification. And their numbers are growing fast.

I’ve had an opportunity to observe what is going on in places like Indonesia, Malaysia, India, and Korea. And, not only in Asia but in Europe and the Mideast as well. I had the privilege of conferring the first CFP® credentials in Germany a number of years ago. It’s been a global professional phenomenon, and I’m happy that I’ve had a small role to play in helping to foster that.

9. You co-founded the Personal Financial Planning Program at UC Berkeley where you taught for 18 years. What role do accredited financial planning programs play in financial planning universally being recognized as a “true” profession on par with law, accounting, and medicine?

Those financial planning education programs are part of the foundation of financial planning already having become a profession and being even better and more broadly recognized as such. And more of them and improvements in them will simply help to improve the profession as is the case in any other profession. The more and better law schools are, the better the legal profession will be. The more and better medical schools are, the better the medical profession will be.

10. You have received numerous awards for your contributions to the planning profession. What would you still like to accomplish?

I have a list of several things, but maybe the most important of those is improving financial literacy among all populations. To me, it is inexcusable that we don’t teach people even basics about money and investment fundamentals at all levels of primary, secondary, and college-level programs. It is an essential life skill. No one should be permitted to legitimately ignore this.

And, I suppose from a professional self-serving standpoint: the more financially literate people are in general, the better the market for financial planning services. None of us should want the marketplace to be ignorant, and I’m happy to say the marketplace has gotten quite a bit more literate than it used to be.

I’ve been in the business now for over 40 years, and I can tell you that clients and prospects are a lot smarter about many issues in personal finance than they used to be, but there are still an awful lot who are not even at square one in understanding how money works. From a societal standpoint, it’s really a shame. We teach people how to add and subtract; we teach people how to read; we teach people how to drive cars, but we don’t teach people how to drive money, and it’s so essential. There’s a great deal more progress to be made.

We should take it upon ourselves as a society to do a much better job of that than we do. I’m not sure what it’s going to take. There are many organizations like NEFE, the National Endowment for Financial Education, that devote effort to this. I think it’s going to be a function of convincing school boards and state teachers’ licensing authorities to make a much, much stronger pitch around these things. 

Carly Schulaka is editor of the Journal. Contact her HERE.

Succession Planning