Top RIA Q&A: Marita Sullivan

Marita Sullivan is the CEO of JMG Financial Group in Oak Brook, Ill.

What prompted you to develop a succession plan?

We developed an internal succession plan because it was very important to make sure the firm continued on as an independent firm — and that our clients know that it isn’t going to be sold off when the most senior partners retired. We all signed off on it in 2007, but we began the process in 2005. This is not an easy process, and that’s why it took about three years to sign it.

Why did the timing seem right to begin developing a succession plan back in 2005?

The senior partners now are second-generation partners. Within a year of the firm’s being started back in the ’80s there were four partners and, by the ’90s, all but one had left. At the time, the firm’s stock had no value; it was merely a way of saying you were an owner. So I started going to seminars and looking at how we would do this. We decided that we had to change the structure and that the stock should be worth something, so we started looking at how we should price it and spread it out. We wanted to find a way through which we all could buy it, so we hired an outside consultant to help us with the process.

We are 100% employee-owned and have 13 shareholders. Most of the shareholders have 5% or greater so we have broad ownership of the firm. There are then four of us on the executive committee who own 60% of the company.

What were the biggest challenges in constructing a succession plan for your firm?

One of the biggest challenges was that we had to change our compensation plan. We had originally been structured in silos and we looked at the money you brought into the firm and you got paid for that. So it was really getting people to understand the difference between being a shareholder and being an adviser. You can be the world’s most outstanding adviser but unless you are doing something to grow the firm much beyond that, then how much of the firm should you own? It’s a really hard concept to understand at first.

Our advisers now know what’s required to become a shareholder. In fact, we added our first new shareholder on Jan. 1, so advisers know that it is possible to become a shareholder. Step one was developing the plan; Step two has worked by having the first new shareholder; and step three will be when we retire the first shareholder.

How do you determine how much someone has added to the firm?

Most firms have a few rainmakers who bring in a lot of money, and they give clients off to the other advisers. Some advisers don’t bring in new clients, but that’s what you’re being paid for — you need to take a step beyond by bringing in new clients and getting JMG’s name out in the public. It’s not just the advisers who can become shareholders; we have three shareholders who are in operations because we believe operations are so important to our firm.

What will the process be like when the first shareholder retires?

We have a payout schedule, so it’s not a lump sum upfront, but over several years. We also have projections to show how the firm grows and how that translates to the payout. We have it in our shareholder agreement that at 70, the other shareholders can call away your stock; if you don’t want to be bought out, the shareholders can put it to the firm to buy you out. Or if you meet certain criteria you can force the others to buy you out before then.

Some people looked at me like I was crazy when we put this in place because I’m going to be the first person who turns 70; two of us will be 70 in the same year. But I wanted to create our own exit strategy; otherwise I would never quit. We just opened a new office in Chicago and everything is going great. But everybody starts to think they’re smarter than the rest of the world and I think other people need their turn to be in charge. The executive committee has been working to identify people who we believe have the skills to take over the leadership role.

What advice would you give firms that are thinking about developing a succession plan?

A succession plan is only important if you really want to stay independent — and have people in-house that have the ability and desire to take over the company. I know a lot of outstanding firms whose succession plan is to ultimately sell to a third party. There’s nothing wrong with that, but that’s not how we chose to do it. You need the good people at the firm to believe that they have a future here and can move up. We are a legacy firm, so it’s important for us to have a plan in place. If you aren’t worried about that, then quit worrying about having a succession plan; just make sure your heirs are taken care of and that’s it.