When handing off a practice, beware of fumbles and stumbles

Karen Folk's transition of her advisory practice to a younger partner was going pretty smoothly.

Then the nightmares began.

“One thing I was supposed to complete was a workload transition plan, which spells out what you do, how much time you spend on it and when you will turn it over to your successor,” Ms. Folk said.

The task was difficult from an emotional standpoint, Ms. Folk, a partner at Bluestem Financial Advisors LLC, said during a panel discussion on succession planning this month at the National Association of Personal Financial Advisors' national conference in Chicago.

“I have some drafts, but it is hard to let go of control,” she said. “I was having [bad] dreams about it.”

Ms. Folk isn't the only financial adviser to find transition painful.

Although the average adviser is in his or her 50s, industry data consistently indicate that just a small fraction have a solid succession plan, despite efforts by brokers, custodians and investment bankers to prod them along.

COMMON CLASHES

The most common succession choice for sole proprietors is to turn over their business to a younger partner, but those advisers still face hurdles even after they have found a suitable successor.

Sometimes it is a clash of work styles or personality between generations, or an inability to find someone they trust among the many young advisers vying to succeed them. Like Ms. Folk, adviser-entrepreneurs who built their own businesses often find that their biggest issue is the difficulty of giving up control.

That is something that physician-turned-adviser Carolyn McClanahan thinks about too, even though she is committed to offering ownership opportunities eventually to employees of Life Planning Partners Inc., which she founded in 2004 to provide financial planning services to other physicians.

Ms. McClanahan doesn't plan to retire for years, though, and has set a goal of doubling the firm's revenue well before then. For now, the firm is too small for her to feel comfortable about diluting her ownership stake, potentially becoming less than a majority owner.

A COMMON AMBIVALENCE

It is common for advisers to be ambivalent about giving someone else decision-making power , said Paul T. Lally, president and co-founder of Gladstone Associates LLC, a mergers-and-acquisitions adviser that works primarily with midsize investment advisers.

“Entrepreneurs realize that they are beginning a process that will culminate in letting go of a business that is like a child to them,” he said. “They are facing their own mortality.”

Another trait that most older advisers share is that they are risk takers who built their businesses from scratch, while the members of the next generation are more likely to be business maintainers, Mr. Lally said.

That leads to problems, too.

“That is where the lack of confidence in giving up control comes from,” Mr. Lally said.

“It is a likely cause when these plans falter and the adviser turns to an external suitor,” he said. “They don't take the time to develop the younger generation.”

Younger advisers who move into a successor role often are described as “the bull in the china shop,” Mr. Lally said. “They bring drive, vision and ideas that sometimes rattle the cage a bit.”

Barry Schmidt, vice president of practice management at broker-dealer Cambridge Investment Research Inc., is used to playing matchmaker to help sellers get comfortable with a successor.

“In most cases, the founder needs to go through almost a period of dating before they feel comfortable bringing along a junior partner,” he said.

No partnership is immune, even when it is being handed off to a child or other relative, Mr. Schmidt said.

CLINGING TO THE DESK

Take the case of one mother that he recently advised during the transition of her advisory business to a son.

Even after the transition was well under way, the founder hung on to her desk in the “position of power” in the center of the office, while her son worked nearly hidden from view in a corner, until Mr. Schmidt gently brought up the topic.

“The son didn't know how to ask his mom to switch desks,” Mr. Schmidt said. “That small change made the son more visible and had an effect in how the succession plan progressed.”

Rodney Zeeb, co-founder of The Heritage Institute, a financial planning and coaching firm, gave his son some space to grow by giving him his own projects to manage a few years after the latter joined the firm in 2003.

“I had to decide whether I would be a monarch or a mentor,” Mr. Zeeb said. “True leaders need to be willing to give up some control, to allow the next generation to make some of the same mistakes they did.”

[email protected]