Biggest and most profitable have plans in place

Financial advisers who have mapped out a succession plan typically lead their peers in revenue, profit and the…

Financial advisers who have mapped out a succession plan typically lead their peers in revenue, profit and the amount of assets that they manage, a new study has found.

Yet only about half of all advisers have developed even a rough plan for passing on their businesses to future owners, according to the 2012 Succession Planning Study by IN Adviser Solutions, a division of InvestmentNews.

As part of the study, IN Adviser Solutions surveyed 404 advisers and found that 7% have executed a succession plan, 15% are ready to implement a plan and 28% are refining their plans.

That leaves about 44% of advisers who said that they are planning to create a plan and 6% who aren’t even thinking about it yet.

The advisory firm owners who have executed a plan, or who are working to refine or implement their plans, have about three times the amount of revenue as other advisers, according to Kelli Cruz, director of IN Adviser Solutions.

About 75% of firms with more than $3 million in revenue have succession plans, while just 35% of those with revenue of under $500,000 have a plan, according to the survey.

“Larger firms are more likely to be prepared to turn over or sell their business to the next generation,” Ms. Cruz said.

“TRANSFERABLE VALUE’

Firms with succession plans also are about twice as profitable and manage about three times the assets of those that don’t, she said.

Firms with succession plans also tend to have more-developed business processes and policies, provide clear career paths for employees and are more likely to benchmark their performance and assess their firm’s value, according to the survey.

Of the group of advisers who have executed a succession plan or are ready to implement a plan, 70% have documented operational pro-cesses, 48% have written job descriptions, and 45% have established career paths for employees.

“They are managing [their practice] more as a business and putting the infrastructure in place to grow, because they recognize that’s how they’re going to create transferable value,” Ms. Cruz said.

Pinnacle Advisory Group Inc. of Columbia, Md., which has about $1 billion in client assets, was designed to grow when it was founded in 1993, according to Dwight Mikulis, a financial planner and the firm’s chief financial officer.

He agrees that succession planning is all part of growth.

“If the firm wasn’t growing, we wouldn’t be too concerned about succession,” Mr. Mikulis said. “If you are in positive growth mode, then you have to think about who is the right talent and what are the right skills to take care of the firm in the future.”

Marita Sullivan, chief executive of JMG Financial Group Ltd. of Chicago, said that her firm, which manages $1.5 billion in assets, started looking into succession planning about seven years ago.

The firm worked with a consulting firm that helped change its compensation plan and make other business changes.

“If we were going to do an internal succession, we had to spread out the ownership,” Ms. Sullivan said. “That was the decision we made, and in the long term, it was better for all of us.”

The decision to trim salaries so that the stock had some value wasn’t an easy sell at the time, Ms. Sullivan said.

“You have to get everyone to buy in,” she said. “It wasn’t the easiest thing in the world.”

The succession-planning process at JMG, which now has 13 shareholders and recently expanded from its original office in Oak Brook, Ill., included creating a formula valuation that results in less than a strategic purchaser would likely pay.

But the owners wanted it to be low enough that potential partners wouldn’t see it as insurmountable, Ms. Sullivan said.

Other advisers settling the succession question bring in a consultant to offer an independent assessment of what the firm is worth.

In fact, of the group of advisers surveyed who have executed a succession plan or are ready to implement a plan, 45% have conducted a formal third-party valuation of their firm as part of the planning process, the survey showed.

By contrast, 15% of those who intend to create a plan have gone through such a valuation.

The survey suggests, however, that money isn’t the prime motivator for those who have succession plans.

Of the advisers who have executed a plan for succession, 77% said that continuing the firm’s legacy and reputation is one of the most important factors in doing so.

About 50% said that identifying the right successor is the most important factor in executing a plan; 27% said it’s negotiating the right deal.

The most challenging transition issues for those who have a plan or who are ready to put their plan in motion are employee compensation and share valuation, the survey found.

About 36% of advisers have a process in place for developing internal successors, the survey found.

“The problem with internal succession is, it becomes too expensive for the people coming up,” Pinnacle’s Mr. Mikulis said.

Yet Pinnacle has implemented an internal succession plan successfully. Its three founders are senior partners, with a majority of the shares; three minority partners have bought into the firm.

The firm allows minority partners to buy shares over time. They receive distributions of profit to help them pay their installments, Mr. Mikulis said.

Other firms, such as The Colony Group LLC of Boston (see story, Page 16), received the financial assistance of an outside firm to help its founder and other principals retire and bring in new owners with less concentrated shares of the business.

“In most cases, those coming into their peak earning power do not have the money to invest in ownership,” said Michael Nathanson, Colony’s CEO.

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