Succession-planning program at Cambridge is bearing fruit

Representatives and financial advisers with Cambridge Investment Research Inc. are taking advantage of a succession-planning program that gives junior reps access to capital to buy into senior reps’ practices while the broker-dealer, in return, gets a piece of the action.

Called Continuity Partners Group LLC, the program was launched two years ago and has seen the number of practices joining the program double, with 46 offices now on board.

That translates into 107 of the firm’s roughly 2,000 reps and advisers participating. And those offices are substantial, representing 30% of Cambridge’s total revenue, according to its owner and chief executive, Eric Schwartz.

Although there are well-established roll-up groups for registered investment advisers, he thinks that the offering is unique among leading independent broker-dealers.

The firm reported $340 million in revenue in 2010, the most recent year for which InvestmentNews survey information was available.

Meanwhile, in November, Cambridge introduced a new component to an adviser’s overall continuity or succession plan: emergency planning in case of a sudden or catastrophic event such as a rep’s death or disability.

In the program, Continuity Express, Cambridge enters into a buy/sell agreement with a rep — typically one who is worried about what would happen to clients in the case of an emergency.

Junior partners are offered a chance to borrow money to buy an ownership stake in the practice, and the firm guarantees to fund the purchase.

Continuity Express isn’t a succession plan, because it doesn’t allow for reps’ retirement, Mr. Schwartz said.

The program is distinct because it allows only for emergencies, he said.

About 150 Cambridge reps have committed to the emergency plan or will sign up shortly, Mr. Schwartz said.

From emergency continuity buyouts to long-term succession deals, Cambridge’s goal with the programs is to cover all types of reps and advisers, he said.

That includes the low producer with $50,000 in gross revenue to the superstar whose group generates $20 million in fees and commissions.

“We believe we have solutions at both ends of the spectrum that no one is doing,” Mr. Schwartz said.

The issue of getting reps to create and then execute a succession plan is one of the most vexing in the independent brokerage and RIA industries. Reps and advisers, an aging population, are routinely loath to make such plans, industry consultants said.

About 50% of RIAs and reps affiliated with independent broker-dealers have no such plan in place, while about 30% have a plan but aren’t satisfied with it, because it is a pro-forma effort done by a mandate of an adviser’s clearing firm or broker-dealer.

That means only about 20% of advisers and reps have a long-term succession or ownership transition plan that they have executed or are actively putting in place, said Jeff Pierce, senior manager of research and consulting at IN Adviser Solutions, which is owned by Crain Communications Inc., the parent company of InvestmentNews.

He based his assessment of reps’ and advisers’ preparedness concerning succession planning on research for a study on the topic based on responses by about 400 RIAs, independent reps and advisers who are registered as both advisers and reps.

It is simply good business for broker-dealers to have a sharp focus on reps’ long-term plans to exit the business, Mr. Pierce said.

Firms will be better able to hang on to those reps’ clients and their assets if a broker has a plan in place, he said, noting that it typically takes a rep 10 years to execute such a transition plan fully.

“In my opinion, there’s a huge opportunity on the broker-dealer side” regarding succession planning, Mr. Pierce said.

“In RIA firms, it’s more of an ensemble business than a single-person practice,” he said.

“In an RIA, there’s usually a junior adviser to take on the roles or responsibilities [of the senior adviser]. On the broker-dealer side, there’s usually only one person operating an office, with no one to step in,” Mr. Pierce said.

“Most broker-dealers are aware that there’s a problem on continuity and succession planning, and basically what they do — and what we also do — is give advice,” Mr. Schwartz said. “They say to the rep, “Here’s an article about succession planning, here are some template forms you can fill out. Now you go figure it out.’”

The difference in the Cambridge program is the funding, and what makes Cambridge’s succession planning unique is its role in financing the deals, Mr. Schwartz said.

The firm essentially acts as a bank in the transactions, lending the money to junior advisers to buy the practices of the senior partner, typically over time. Continuity Partners Group then collects interest on the loans and also owns a stake in the practices.

The reps, in turn, wind up owning a piece of the group.

And Mr. Schwartz is putting $9.5 million of his own money into the financing program, as well as a swath of company stock he dubbed “pseudo-equity.”

Because the transactions are structured as private offerings, Mr. Schwartz declined to comment about the specific terms of the deals.

Although the firm has the standard succession-planning materials, “we are also saying Cambridge will step in” to finance emergency or long-term acquisitions, he said.

LONG-TERM THINKING

Mr. Schwartz stressed that the succession process requires long-term thinking by advisers.

“What we’ve discovered with our advisers is that none of them want to sell their practice now, but they want to sell it down the road,” he said.

When it comes to selling their businesses, reps and advisers typically face two choices, Mr. Schwartz said: sell their practice to a bank and lose all control of the business, or sell to junior partners, which is emotionally satisfying but hard to finance, as the junior partners don’t have any money.

“Ultimately, Continuity Partners Group provides the money so the junior partner can buy the practice,” Mr. Schwartz said.

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