A man who does not think and plan long ahead will find trouble right at his door.  —Confucius

Much is being written these days about the need for succession planning in our profession. According to CNBC, “Data produced by research firm Cerulli Associates suggest a bleak outlook for the industry. Aging advisors are expected to retire in droves over the next two decades, and relatively few young people are entering the industry to take their place. Financial advisors without a succession plan for their practices put not only their own retirement at risk but also the well-being of their clients. The average age of advisors in the country is now 50.9 years, and 43% of advisors in the industry are over the age of 55 years, while just 11% are under the age of 35. Based on the expected number of retiring advisors, the entrance of new advisors to the industry and the growth in demand for financial advice, consulting firm Moss Adams has estimated that the industry could face a shortfall of more than 200,000 advisors by 2022. While the industry as a whole faces a looming talent shortage, RIAs—particularly solo practitioners—are the most vulnerable. Most of them lack the resources to recruit and train young people, and studies show that just 30% of them have any explicit succession plan.”

Several years ago, a quality high-service boutique accounting firm with whom we shared several clients was merged with a large national firm (“taken over” is a better description), and it wasn’t long before we noticed a significant difference in the firm’s service proposition. It seemed much less personal. The clients we had referred to this firm over the years also noticed, and many eventually found alternative firms with which to do business. We stopped referring business to them.

There was only one surviving partner from the original firm (the others had retired). I asked him why they decided to join forces with the other company, since they appeared to be quite successful. He acknowledged that things were far different than they were before, and that while it was positive to have the financial backing of a large firm, it certainly changed the relationships they have with their clients. But the firm really had no choice. There were four partners and all except him were getting ready to retire. There was no way, he said, that there would have been enough money to pay the other three and maintain the business. He seemed sad as he told the story, even though he was now the managing partner of this new branch.

Why, I asked, weren’t ownership opportunities offered to those young accountants that the firm had hired over the years—many of whom had left it? He didn’t really have an answer, but it seems obvious to me that the major reason was that the four partners simply did not want to dilute their ownership.

Today, we see many financial planning firms in similar situations. As I attend meetings and have discussions with other planners throughout the country, I am amazed at the number of firms that are owned by one or perhaps two people in their late 50s or 60s who have no viable exit strategy. Without younger professionals in their firms to purchase their shares, is there a market, or would they be forced to sell to a firm that may not share their values?

Early in my career, I decided that I wanted to build a firm that could function and grow without me. To do so meant investing in quality people and offering them opportunities to grow and prosper. Some planners with whom I have spoken have expressed concern that diluting their ownership by offering shares to other professionals may adversely affect their income.

I once pointed out to a planner who was reluctant to give up ownership that if she offered stakes to others, she would create a market for her shares when she retired (among other advantages). She replied that if she owned 100% of the firm and 100% of the profit, she would be able to invest enough to fund her own retirement. But where would that, I wondered, leave her clients?

Over the years, I am sure that my income has increased as a result of the additional shareholders at our firm, and my partners and I created a market for the shares we own. Perhaps most important is the fact that our clients know that there will be no disruption in the quality of the services they have come to expect.

Other planners have told us they are reluctant to hire young people for fear that they may be training their competitors. That, of course, may be a risk if the young planners feel their opportunities to grow at a firm are limited. However, the valuable people we have hired in our firm have not left because we have made it possible for them to acquire ownership positions. This has been the growth model for successful law and accounting firms for years.

That brings us to our own firm’s recent transition. In January of this year, I sold all of my shares in RTD Financial Advisors Inc., part of the transition that began several years before. I have relinquished most of my management responsibilities to other highly qualified shareholders.
Jeff Weiand, who has been with the firm since 1985, has been our chief operating officer for about 10 years and is now president of RTD. Rich Busillo, who joined RTD in 1986, is chairman and chief executive officer.

In addition to Jeff and Rich, we have added other shareholders over the years and now have six. In addition, there are several other highly competent associates who will undoubtedly become shareholders in the future. I can confidently say that our firm will continue its growth for several generations. And while I am no longer an owner of the firm, I continue to service clients and am available if I am needed by the firm’s officers. However, since I have considerable confidence in the other shareholders, I am not “meddling.”

So what has been the result of that decision I made many years ago to sell some of my shares and adopt a formal succession plan?

• I was able to monetize my equity in the firm. And all other shareholders know that they have the same opportunity.

• We have learned from each other over the years because of the broadened perspective that comes from having multiple owners.

• The good people we hired over the years do not leave to establish their own practices or join other firms that may offer better opportunities.

• The incentive to grow the firm is intense.

• Our shared values have created an atmosphere throughout the firm of doing what is in the best interest of our clients.

• Since new planners know that there is an opportunity for equity ownership, we are better able to recruit quality associates.

• Since our clients were made aware of our succession plans, the transition for them was a smooth one.

• On a personal note, I am confident that the firm I helped to build will continue without me and will be my legacy to the profession.

As I look back on my career in financial planning and the development of our firm, I can unequivocally say that the best decision I made was to invite key associates to buy shares in the firm and become partners. No other decision has had more impact on our growth over the years. We have had unusual stability (three of us have been with the firm for about 30 years).

Our system for buying and selling shares is simple. We value the company, internally, as a multiple of gross revenue. But the system itself is not nearly as important as having a plan. You may settle on a different formula or even get a professional appraisal to value your firm. We chose simplicity, but it is the concept—not the formula—that is important. While we are not equal shareholders, none of us has ever voted our shares. At meetings, we each have one vote, and that has made for a very healthy relationship among us.

If you haven’t already done so, I encourage you to establish a succession plan. You deserve to monetize your equity. Other associates in your firm deserve to create equity of their own. And, most important, clients deserve continued quality service.
 

Roy Diliberto is the chairman and founder of RTD Financial Advisors Inc. in Philadelphia.