Beyond retention, low morale is likely to result if equity ownership issues are not dealt with. Fragile relationships between partners and the next generation are a common theme. These problems will also overshadow other critical activities the firm is pursuing, such as aligning behind a growth strategy or compensation planning.
Partnership frustrations can and will seep into other areas. As a result, the firm’s culture and output may be, well, kaput.
The obvious question is this: How genuine are owners in their commitment to effect an internal succession?
According to the “2019 TD Ameritrade FA Insight Annual Study of Advisory Firms: People and Pay,” 64% of advisory firm owners anticipated an internal succession as their primary succession solution. One-third of these owners had yet to develop a succession plan. A further 45% had a “loosely defined” plan only.
The study also showed that 17% of firms intended to sell or merge to effect their succession plan. As a co-author of the “People and Pay” study, I cannot help but wonder if the current buoyant M&A market has further tested levels of commitment to internal succession.
According to the study, 9% of firms expect primary owners to depart within three years. Most firms, 59%, have a longer runway of 12 years or more before primary owners intend to depart.
For some firms, a longer time frame for the departure of owners, especially majority owners, gives less tenured talent the opportunity to grow into ownership. For other firms, long-term ownership holdouts can become a frustrating and deflating issue for the next generation.
Disputes over the transition of stock, control and decision-making authority can take an almighty effort to resolve. Without doubt, these issues cannot be navigated without mutual trust. So what exactly does this look like? Transparency is fundamental.
Majority owners generally have the right to induct new owners, or not. They have the right to leave the firm on their own terms. They also have a responsibility to make their intentions known to their partners and set realistic expectations for the future.
This is where self-reflection is important. As an owner, when it comes to succession, are you clear on what you want for yourself, your partners, your team and your clients? Despite the best of intentions, flip-flopping on succession decisions can diminish trust, undermining the strength of important relationships.
Talented team members are owed clarity on the opportunities that exist within the firm. Vague intentions to establish a succession plan can be disheartening. Off-the-cuff comments that raise hopes can be harmful if not followed by action. Where owners are not particularly committed to the work required for an internal succession, it’s best to call it.
Be aware that individuals are operating on their own internal clock, marking progress toward their goals. A delay in the transition of equity could mean the end of the line for talent who feel they have persevered long enough. This includes minority shareholders.
Trust and transparency are as essential in business as in other aspects of life.
Where trust is breached, the consequences can be far-reaching and irretrievable. Mutual respect among partners and team members is a precursor for effective internal succession.
Leaving ownership issues unchecked is not really an option, and often, an external perspective is needed to break the deadlock. As they say, “The only way out is through.” While ownership challenges can feel insurmountable, when shareholders work together to get it right, they create the greatest potential for restoration and renewal.
Eliza De Pardo is Founder and Director of De Pardo Consulting.