by Joe Pitzl, CFP®
Joe Pitzl, CFP®, is a principal at Intelligent Financial Strategies in Edina, Minnesota, and is a past president of FPA’s NexGen community. (email@example.com)
As a young planner, I have closely followed the topic of succession planning for years. The industry now publishes articles on this topic every month, develops entire tracks at conferences, and hosts full-day preconference sessions dedicated to the subject. In addition, business and marketing coaches spend countless hours teaching firm owners how to increase the value of their firm as they approach their retirement years.
Despite the volume of attention this topic gets, however, it is rarely visited from the young planner’s point of view. As a NexGenner myself, this is a curious paradox, given that we are the likely buyers. Further, it is a particularly daunting topic to broach, as it has a tendency to deteriorate rather quickly.
Given that, please bear in mind that this article is written from the perspective of one NexGen planner. My current firm is the fourth firm I have worked for since graduating, and my partner and I are now in year three of a successful business transition. We are already starting to think about our own. After all, in his book Family Wealth, James E. Hughes explains that “the most important role in the management of an enterprise is arranging for orderly succession.”1
Conflicting Visions and Time Horizons
Right off the bat, a targeted successor views a business through a very different lens than someone beginning to plan a transition. They may have significant changes they would like to undertake with the firm to prepare it for the next 20, 30, even 40 years, while the existing owner sees a relatively short time horizon to maximize or maintain their firm’s value before walking away.
Young planners often do not realize the magnitude of the changes they are asking for, particularly when there is no guarantee those changes will actually have a positive impact.
Change is often a difficult thing, particularly when someone has been successfully doing things a certain way for a long time. Firm owners have every right to protect their investment and the value they have created. However, you must weigh this against the reality that outright rejection of your successor’s ideas will, at best, adversely affect the amount they will be willing to pay for your firm, or at worst, send them packing.
It is often said that young people have no loyalty. Young people actually have extraordinary loyalty—not to people, but to causes and issues they believe in. This is not a generational phenomenon, but is often portrayed as one. Human beings choose to work for companies, buy products, and vote for people who share their beliefs, biases, and values.
When I visit a firm’s website, for example, the first thing I look for is its purpose, mission, and vision. I want to know why it exists and why you get up in the morning. Loyalty is not about you, it is about what you stand for and whether you are true to that. More importantly, stating a cause does not result in loyalty; you must live it. A “financial life planner” who works 70 hours per week is hard to reconcile.
My decision to leave the first firm I worked for had absolutely nothing to do with the people. In fact, I remain fiercely loyal to the people there and still consider it to be the gold standard for financial planning firms.
Strangely enough, I realized I could not stay during one of those really cool client meetings where the client expresses their unwavering gratitude for everything the firm has done for them over the past 25 years—a rags to riches kind of story. It was one of those meetings that makes you really proud to be a planner, and really proud to be associated with a firm like that.
Unfortunately, that very experience created a difficult conundrum. I realized that I would never be able to make that profound of an impact on someone’s life working in any firm with seven-figure minimums to get the process started. Do I kick and scream for a wildly successful and rapidly growing business with 30 other employees to change its model or make exceptions to accommodate me?
Real loyalty requires me to respect who they are and who they work with. Loyalty to their process and philosophies is the reason our firm’s service model bears a strikingly close resemblance.
In the Snow … Uphill … Both Ways
Growing up in Minnesota, we heard all kinds of tales from our parents and grandparents about how they walked to school every day in sub-zero temperatures, into the blistering wind, through the snow, uphill, both ways. It sounded terrible. But true or not, I was still going to take the bus!
Mark Tibergien recently told his audience at Pershing’s annual Insite conference that older advisers are driving young advisers out of the business with poor management and lack of growth opportunities. He explained that as many as 25 percent of young people in the profession will leave it for a different line of work.
When this summary was published on Financial Advisor magazine’s website,2 the comment section immediately lit up with statements like: “The problem is, no one wants to work anymore. I worked 7 a.m. (when the market used to open) until 9 p.m., four days a week … left at 5 p.m. on Fridays and worked every Saturday for five years.”
I continue to be completely puzzled by comments like this. First, I submit that no one should ever feel ashamed to admit they will not live like that, regardless of age. My 8-month-old son wakes up around 7 a.m. and we put him to bed around 7:30 p.m. I really enjoy seeing him every day, and there isn’t enough money or opportunity in the world to convince me otherwise.
Second, someone willing to put that kind of time and energy into a business is probably going to start their own, not work for someone else. This simple fact explains why I am willing to whip out the proverbial checkbook to buy equity instead of building it through sweat.
Your Successor Is Not “Mini-Me”
It seems entirely rational to target and hire someone like you as your successor, as it would seem more likely that a younger version of you would understand you better, understand your vision more clearly, and be far more predictable in terms of what they need and want for the business. In some large ensembles this may be true, but for the majority of planning firms it is counter-productive.
When you were young, one of the main reasons for starting your business was having the ability to do things your own way and work with the type of people you like to work with. And if you are completely honest with yourself, you may even realize how unlikely it is that the 25-year-old version of you would work for you today.
Your mature business does not need another entrepreneur; it needs a caretaker. The personality required to start a firm from scratch and grow it into a sustainable business is a very different personality than the one required to successfully take over an existing firm. For two years now, my partner and I have spent every waking moment ensuring that we deliver on every promise we and the previous owners made to our clients. Save for a few relationships we chose to terminate, this has paid off in the form of 100 percent client retention. The founder of our firm was a rainmaker. My partner and I are caretakers.
When Sales Is a Dirty Word
There is a huge misconception that younger generations don’t know how to sell. The reality is that it is entirely dependent on what we are being asked to sell.
You likely started your own business, changed broker-dealers, or converted your business to an RIA because it allowed you the ability to practice the way you believe in practicing. If you allow your young planners enough autonomy to practice financial planning the way they believe, they can sell that. However, “sales” becomes a dirty word when you ask someone to go out and sell your philosophies and service model. You must either marry your philosophies or drop the expectation of them to produce for you.
Valuation and Value Drivers
Revenue and earnings multiples are important factors to get a general sense of what a business is worth. In large firms with multiple owners, these factors may literally dictate how much shares are worth. However, they are nothing more than a starting point in smaller firms.
Your client profiles matter, and in the game of succession planning, firm minimums often work to your detriment. In many cases, a 40-year-old client with $250,000 accumulated may actually be worth more to me than a 70-year-old with $1 million. Tibergien has recently stated that if he were buying a firm, he would discount its value based on the number of clients and staff over the age of 55.3
One of the most difficult concepts a business owner has to come to grips with is that your business is worth a lot more to a buyer if you are not needed to run it. If you have to be there for the business to support those multiples, it is worth a lot less when you leave!
These are particularly painful issues for firm owners to wrestle with, as they require you to begin to give up some control. However, the closer your business matches your successor’s vision, the more they will be willing to pay for it. After all, people are willing to pay more for something they want, rather than what you want.
- Hughes, James E. 2004. Family Wealth—Keeping It in the Family. New Jersey: Bloomberg Press.
- FA News. 2012. “Tibergien: Older Advisors Driving Young Out of the Business.” Financial Advisor (June 7).
- Tibergien, Mark. 2012. “X + Y = Greater Value.” Investment Advisor (August).