David Goad, owner of Succession Planning Consultants in Newport Beach, Calif., is a thoughtful kind of guy.

Having founded FPTransitions, the Portland, Ore., company that brokers the buying and selling of advisory practices, he eventually left when finally convinced that the "internal succession" carried more promise than the "external successions" promoted by FPTransitions. Thus he built his consulting firm to help advisors conduct successful internal successions.

What has long bothered Goad, though, as well as most industry observers of advisors' succession attempts, is the question of how to formulate a successful succession plan for a solo practitioner who has no "built-in" replacement. Says Goad, "Today, more than ever, any succession plan must consider the client first. What I call the 'solo-to-ensemble' model offers a buyer, seller and clientele the best of all worlds by mimicking a seamless internal succession plan. Those who pursue this strategy will more comfortably discuss with their clients their inevitable, late-career transition, instead of suddenly shocking clients with the news."

How did Goad's thinking evolve toward the solo-to-ensemble model? "These changes aren't being driven by buyers or sellers [supply and demand], as in the past, but by clients and their experiences." First, says Goad, the profession has changed from what it was ten to 15 years ago, when nonrecurring revenues meant nonrecurring client contact. Most firms today have a respectable amount of recurring revenue, which requires advisors to be in touch with clients more frequently. In the old days, clients weren't particularly bothered when they received a notice on their quarterly statements that a new advisor had been assigned to their accounts. But with recurring revenues from investment management services, all of that has changed.

Second, says Goad, "With the economic events of the last two years, my observation-based on studies we perform regularly for our advisory firm engagements-is that clients clearly want a role in the seller's succession planning. Internal successions are highly favored by clients. Inasmuch as the market experience of the last two years may endure for some time, clients will no longer tolerate the sudden introduction of a previously unknown advisor. This has furthered advisors' understanding that succession strategies must not only be client-friendly and but also accommodate early- and mid-career buyers in the marketplace. So we still have supply and demand driving succession planning, but it's morphing in a totally different direction than expected. Very few deals are getting done that bring in an outside buyer with the seller exiting soon thereafter."

The two forms of "solo-to-ensemble" model Goad has increasingly used with his clients-48 engagements in the last 12 months-are the entity merger and the asset merger, which he dubs "Lite Merger."

"The entity merger allows the seller to better monetize the entire value of his firm, including secondary value drivers unique to that firm, such as processes and systems, branding, human capital, marketing niches, etc." And it works as follows: The advisors combine their operations without any initial legal tie-in. They analyze their pre-merger expenses and revenues and compare them to post-merger expenses and revenues, determining what both parties' expenses are in deriving their respective shares of the net profitability of the firms when combined. Advisors enjoy a significant reduction in overall expenses when they come together, making the new entity immediately more profitable than the predecessors by themselves.

"All of this results in lower risk," says Goad, "because if it's successful, the buyer can begin to acquire ownership over, say, two to five years and the success rate is much higher because clients get introduced to the seller's successor over time rather than right away, as with an external succession. In the old method, buyer and seller had to ink the deal before the buyer was introduced to clients. This way there's less risk because there's no legal commitment until both parties have a high level of certainty the arrangement will work out."

With the "lite" merger, or asset sale, client relationships are being monetized, but not the secondary value drivers, says Goad. "Buyers are 'carve-out' buyers looking just for client relationships. The combined operations of the firms lowers or decreases expenses, but there's no recasting and sharing of profits-just two separate businesses in the same working environment. The buyer buys clients-not the seller's entity-over time, as the probability of success grows."

What happens in either case if the seller has sold, say, 20%-30% of his entity or assets and things don't work out? "First, he needs to maintain at least 51% of his business so he still controls the operation while a method is established up-front for buying out each other's shares if the combination fails. With the 'lite' merger, the seller has just sold clients, so there's no continuing relationship or obligation. That's why some advisors like 'lite' better." In practice, says Goad, he's had none of these deals unwind yet.

In both cases, he adds, these strategies are done internally and give the parties the opportunity to maximize the new firm's value. "This is a huge shift from the past," says Goad. "And both methods are client-centered."

Success is determined by the terms of the deals, too. Neither type requires a capital outlay or down payment, a requirement that ordinarily leaves out scores of potential buyers who can't come up with the necessary cash. This opens the door to many more merger candidates, giving the seller the opportunity to apply higher standards for his successor in terms of desired skill level and experience.

Why have Goad's two strategies met with such great success? "In essence, these merger strategies recognize, more than in years past, that client relationships are more sticky to the current advisor; therefore, a sudden change of advisor through the external sale method sounds too risky to late-career advisors. Our mergers simply mimic an internal succession, which leaves clients feeling more comfortable. Instead of looking for an external buyer, the soon-to-retire solo advisor looks for a local and credible early- to mid-career advisor who is willing to entertain moving their physical presence into the veteran advisor's business, or vice versa. They share office expenses and map a plan for the transference and sale of part or all of the entity and/or its clients."

Another advantage, says Goad, is that the process can be accelerated or slowed down to address market concerns or slow client acceptance or problems in the working relationship. "The advisors never officially merge, and they continue to live off their own books. If desired, the seller can keep some of his clients into semiretirement and create a contingency buy/sell for the balance of those clients with the new advisor."

Is the solo-to-ensemble model truly viable? To answer this question, we solicited a second opinion from Mark Tibergien, former Moss Adams executive in charge of in-depth industry studies and the CEO for Pershing Advisor Solutions LLC. Having consulted on numerous advisor mergers and successions, Tibergien expressed his views on the ideal solo practitioner succession plan: "There comes a point when the advisor must think about how to align him or herself with a firm that will serve his clients well, either due to a contingency or an orderly transition. [Solos] have difficulty giving up control, but they must think about how to ensure their clients' welfare isn't disrupted by the advisor's bad health or his decision to retire. In fact, it's his fiduciary duty to ensure continuity of advice to his clients."

How to do it, then? "Many solos have cross-purchase agreements with other solos. In spirit, this is a wonderful approach, but in practice, it's not so good. Usually, the other individuals are the same age or they're operating at capacity, so this tends to be an emergency measure." Ideally, says Tibergien, the advisor should enter into an agreement with a larger practice or merge his practice into a larger practice three to four years before his planned exit. The advantage, he says, is that the larger firm has younger people who can be developed, so there's no capacity problem.

How about bringing in a partner three to four years before retirement? "The problem with bringing in a partner is it simply doesn't work out sometimes." Is Goad's succession plan a viable alternative, then? "It's a reasonable proposition," says Tibergien, "because the challenge for the seller is to know how culturally compatible a merger candidate will be with his clients. Most sellers are sensitive to how clients will be dealt with, so any kind of co-habitation makes sense to develop familiarity."

Of course, there's still the downside that the merger isn't going to work, leaving the advisors back at square one. "That's just part of the risk of being a solo practitioner," says Tibergien. "There will be fewer succession options, and anytime you create an economic tie-in with another firm, you create disruption if the deal must be undone."

"It's always interesting to see how tentative relationships work out. If the advisors' attitudes are 'Let's see how it works' instead of having a strategy that says 'Let's see how we can make it work,' then the merger is probably doomed. It's not just 'Let's share our toys and enjoy the sandbox together.'" Tibergien adds that advisors must not just let fate define their success, but instead work toward an end game.