"What was just 20 years ago a fledgling industry made up of young, ambitious entrepreneurs is now a big business dominated by geezers," wrote Mark Hurley in Investment News ("Don't Put Off Succession Planning," September 2010). "Our data suggest that more than 60% of the industry's participants are over 50, and the average age of an owner is rapidly approaching 60."
Assuming the data is correct, a tremendous number of practices will change hands in the next decade. For certain advisors, selling to an external buyer will be the right move; for others, an internal transition will make the most sense. In this article, we outline some of the pros and cons of selecting an internal successor, with a focus on transfers from a senior advisor to a junior advisor. (In the next installment of this two-article series, we'll discuss the pros and cons of choosing an external successor.)
The Pros
In terms of providing a seamless experience for clients, choosing an internal successor can certainly have its advantages. Typically, a junior advisor has developed relationships with clients, knows the firm's processes, and will continue to follow the senior advisor's investment philosophy.
Established relationships. A junior advisor who has worked for five to ten years alongside a senior advisor likely knows the firm's clients well. Of course, this depends on the extent to which the junior has been involved in client work. If the junior's main role has been to prepare for and follow up on meetings without a lot of client face time, he or she may not be in a much better position than an external candidate. In fact, clients may have pigeonholed the junior in a support role if that's the only context they've ever seen him or her in. But if the junior advisor has developed beyond the service role, interacting with clients and perhaps meeting with them in the senior advisor's absence, he or she may be a prime candidate for purchasing the practice.
In addition to relationships with clients, it's also likely that a midcareer junior advisor has formed relationships with the firm's broker-dealer, custodian, external technology partners, compliance or regulatory auditors and other business providers. If the junior takes over the practice, he or she will be able to hit the ground running, without needing to spend time building those relationships.
Shared investment philosophy. A junior advisor's investment philosophy is often shaped by the senior advisor's opinions and biases, especially if the junior has worked alongside the senior for many years. For example, a junior is likely to share the senior's attitudes toward alternative investments, hedge funds, fee-based models, investment outsourcing, annuities, and the like. If the junior ultimately takes over the practice, the investment message to clients will likely remain the same. During a transition, clients sometimes question the value of the relationship, and investment alignment supports client retention.
Familiarity with firm processes. An internal successor is usually well acquainted with the firm's processes, which helps smooth the transition experience for clients. For instance, if the firm's "A" clients get quarterly meetings, birthday and anniversary cards, monthly market updates, and an invitation to the annual client appreciation event, the junior advisor knows the details and can sustain these processes without change. A sense of continuity helps reassure clients that all is well when a new advisor takes the helm.
The Cons
Now, let's look at the potential downside of having an internal successor, again focusing on transitions from a senior advisor to a junior. The frequently overlooked factor a senior advisor needs to take into consideration is that developing a junior takes time and attention. Knowledge and experience cannot be gained overnight. And the energy required to educate the junior is energy the senior advisor would typically put into rainmaking, so there is a financial cost involved in this process. In addition, there can be an emotional cost, as mentoring can start out as a pleasant experience for the senior but deteriorate over time into a task that becomes harder and harder to fit in.
There are other potential downsides to consider as well:
The risk of losing clients. The biggest fear senior advisors have about an internal transfer is that, as the junior becomes adept at developing and maintaining client relationships, clients may begin to value the junior as much as the senior. If this happens, the senior may lose clients should the junior decide to pick up and start his or her own practice. Even with a non-compete agreement, an aggressive junior who leaves the practice may create messy issues for the senior advisor and the firm's clients.