Brooks Nelson of Nelson Roberts Investment Advisors shares lessons.

    In this, the second article in our series on succession plans other than sales to outside parties, we take a look at Brooks Nelson who, in his 51 years, has probably thought and learned more about succession planning than most advisors ten years his senior.
    You may remember Nelson as an early poster boy for Charles Schwab's Schwab Advisor Network, the Schwab program that collects thousands of annual dollars from advisors in return for the promise of high-net-worth referrals. But what you don't know is that Nelson has figured prominently in two rather complicated successions that are instructive for those advisors who hope to someday exit this industry with some semblance of financial gain.

In this third incarnation now as a principal in Nelson Roberts Investment Advisors (, Nelson learned the money management game in his father's California firm, Rea Nelson & Staight. He started at the bottom in 1985 and moved on to business development. (The firm's name changed to Nelson Capital Management around 1986). "I went through the CFA program and picked up my education on the job." Why the business development stint? "Before joining the firm, I had worked for IBM right out of school, selling machines for hundreds of thousands of dollars that, two years later, were replaced by the PC. It was the best training one could have had for sales and marketing."
    If you're sensing a strength of character, it was fortified further when in 1990, Nelson fought Lance Armstrong's war-an insidious but treatable form of cancer that, despite the need for chemotherapy and long absences from work, had a silver lining. "My dad, because of my absence, woke up to how important I had become to the business. When your children are ill, you focus on your own mortality. As soon as I was healthy, he was eager to have me run the business and take over managing the firm." Nelson, his cancer completely in remission, did so during 1990 and 1991.
    That was the first of Nelson's successions-managing a first- to second-generation transfer. "It was really a years-long process, and my father never completely retired. He used to say, 'I want to work as long as my noggin is still working,' and we accommodated him." Nelson's father passed away in late 2002 after a period of Alzheimer's, but not before witnessing his son's successful transfer of the business and subsequent nurturing of it so that it flourished far beyond anything his father could have imagined.
    It all sounds so simple, but successions are never simple, particularly when they take place between generations. Before the succession could succeed, Nelson needed to be groomed. "First, I had to have the necessary experience within the business so I would understand the business," says Nelson. That phase took about five years. The second phase was giving Nelson experience in managing people. "The challenge was engineering with my father a transfer of authority so that he didn't feel ignored and disrespected, and also engineering a viable and fair liquidation of his ownership of the business." One, says Nelson, is human resource relations, and the other, financial engineering, what he terms "the two most difficult things in any small, closely held business succession."
    Did his father give up control easily? Yes and no. "It took patience and understanding. We had to work on communication. The money management business is populated with people who are largely self-starters; they're not shy and retiring, and my father was no exception." So sometimes there were "issues," says Nelson, when everyone needed to take a deep breath and let the heat of the moment pass. "I had to make an effort to understand my father's desires and motivations [to get through those moments]."
    The transfer, from a financial perspective, was complicated by the fact that it was between family members. "There is a rule of attribution in the IRS Code, so any partial sale of stock in a closely held business in which there's a family relationship isn't considered a sale, but a dividend, with no real change in ownership." And dividends were subject to double taxation at ordinary income levels, which presented a difficulty.
    Nelson and his father sidestepped this tax trap by agreeing to a buy-sell pricing metric that put as low a price as possible on the business. "That enabled me to buy him out completely, so a portion of what he was paid received favorable capital gains treatment."
    Over his father's remaining years working for Nelson Capital Management, Nelson augmented his compensation with a deferred compensation plan to provide a return for his many years of founding the business. But it was a deferred comp plan with a twist. "The smartest thing I did was to key my dad's deferred comp to a percent of the firm's revenues, because that eliminated any motive or incentive for him to worry about what I was spending money on."
    It also motivated his father to do whatever he could to keep revenues up, so client retention and new business became his focus. "In later years, when he was no longer the primary rainmaker, having him there greatly aided in an orderly and comfortable transition for the clients from my dad to others in the firm."
    The picture you should be getting is one of a very gradual succession. After all, Nelson and his dad were keeping it all in the family, and there was no rush. "So, while ownership and control passed overnight in a legal sense, I didn't make decisions without seeking my father's advice. It was only after many years that he dis-involved himself in matters of strategy and planning."
    Thus ends the first part of the succession story. Young man goes to school. Young man graduates and enters family business. Young man takes over family business.
    And young man grows family business to become merger target. It was 1994. Silicon Valley was exploding and Nelson was being asked to participate in Schwab's Advisor Network program. "It had such an impact on us, I made the decision to completely exit the institutional business. We'd had some profit sharing and endowment clients and had marketing people attempting to get us more, but I decided to cease that effort and redirect those resources to high-net-worth individuals since the institutional business was becoming more competitive and we were no longer large enough to compete effectively."
    In order to attract individual clients through Schwab's then-new referral program, Nelson had to lower its minimums rather significantly-from $1 million to $200,000 (which they later raised back to $500,000). "But, the real key was that we were lowering our minimum in that 1995-2000 period, so the number of client relationships increased tenfold. We had many barely qualified clients who became worth millions-in one case over half a billion on paper-overnight."

Of course, quick growth brings its own set of problems. "You reach a point of about ten employees when you have to change your hiring policies. Under ten employees, you fit your job descriptions to your staff; over ten employees, it makes more sense to organize your business into critical roles and then fit the right people into those roles. We went through that transition." Nelson also learned to begin investing in and using technology, as other advisors are now learning to do, to control HR costs.
    This efficiency he was building into the firm made it all the more attractive to outsiders. So did the firm's investment performance. "We had a very good 2000. The S&P was down 9% or so and we were up 4.5%. Client growth slowed in 2001-2002, so we focused on maintaining firm profitability." In spite of the bubble's burst, interest in Silicon Valley remained strong. "We saw U.S. Trust and Northern Trust opening offices, was created, and Bessemer Trust bought out part of a large Silicon Valley money manager."
    Competition that had once consisted of cross-town colleagues was now institutional big boys. And Nelson Capital Management was not going unnoticed. "Within one week, two banks approach us about being acquired, and we thought, 'Sure, we could compete better against the big boys if we could broaden our service offering, as the banks have.'" But, while Nelson knew how to manage money and manage a money management firm, he didn't have a clue about how to sell one.
    "So we took a step back, interviewed investment bankers to help us negotiate with these banks, and that became the second-best decision I ever made." In October 2002, Nelson Capital Management became an asset of Wells Fargo Bank.
    Young man takes over family business. Young man gets a little older and sells family business. But lets step back and take a closer look at the investment banking experience, since it's an integral part of the succession process from which Nelson learned more lessons.

After interviewing three or four investment banks, Nelson hired John Temple at Cambridge International Partners in New York City. "We said, 'We have two banks ... help us negotiate.' He said, 'If both of your neighbors wanted you to sell your home, would you sell to them or put your house on the market?' So we put the business on the market." Instead of negotiating with just two banks, Nelson received 50 inquiries, 25 of which signed nondisclosure agreements and 12 of which made him offers. The finalist, of course, was Wells.
    "Our rationale was that we wanted a partner that could help us broaden our services, that could continue to give our employees great advancement opportunities, and that could help us distribute our services further. Wells could do all three, and had an incredibly strong brand."
    So Nelson-as many owners do, and as his father did before him-became an employee in what had once been his own firm. "Yet, I woke up one day and realized I'm more motivated and happier when I'm in an entrepreneurial position, so I made the difficult decision to depart and start over. I started with Wells in October 2002 and left in February 2004. My departure was on terms acceptable to all parties. I respect what they do; they are an incredibly well-run bank with one of the most wonderful brand names in the retail banking business."
    If you stop and think about it, what Nelson did was probably inevitable. He'd taken over and managed an existing firm and he'd later worked as an employee in the same firm, but without control. Yet, he'd never started a firm on his own. Which is why the next step had to be Nelson Roberts Investment Advisors. "My goal in starting Nelson Roberts was to create a wealth management firm that approaches the management of client assets in a holistic way and maintains strict business acceptance guidelines so quality of service is at a superlative level that clients deserve, while at the same time making a well-run and highly profitable organization."
    The new company has given Nelson a chance to apply all the lessons he's learned about organizational management to a new canvas. For example, Nelson Roberts is far more efficient than Nelson Capital was when Nelson last played a role in its management. "We have only five employees now. When Nelson Capital had the same assets and revenues that we have today, it also had almost 2.5 times the number of employees." Having had the opportunity to do it right from the start, Nelson attributes much of the new firm's efficiency to today's technology.

It seems likely Nelson will stay put for a while with Brian Roberts, his 32-year-old partner. "Brian's doing basically all of the firm's operational management which, frankly, is a big part of the change that's occurred in restarting this business. He worked with me at Nelson Capital for almost ten years, during which I tried to train and cultivate him to succeed me as the business manager at that firm. So now he manages HR, compliance and technology, which is fabulous for me because I no longer want to do those things. I can focus on business development, client service and investment strategy and management."
    Which brings Nelson to the point of considering his next succession plan. Like his dad and others he admires-Roy Neuberger and Philip Carret-he could well work into his eighties if his health permits. "The wonderful thing about this business is that there is no preconceived time when you have to ride off into the sunset, because there's no substitute for experience." He says that's why his dad was always revered. "His experience couldn't be duplicated except by others his own age."

And where does that leave Brian Roberts? "I believe in giving contributors to an enterprise an equity stake in the business and Brian's got a significant minority stake. Ten years from now, Brian will have more control. Maybe we don't yet have all the T's crossed and the I's dotted, nor is the timeline fixed, but it's understood that he will have more control."
    Knowing Nelson's track record, it would seem that Roberts has a fabulous opportunity to be a significant owner and day-to-day manager of a growing organization. As Nelson says, the succession timeline isn't fixed in stone, but the etchings are there for all to see.

David J. Drucker, M.B.A., CFP, an independent financial advisor since 1981, now writes, speaks, and consults with other advisors as president of Drucker Knowledge Systems. For more information about him, visit or