What’s your firm worth, without you?

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by George Ray

Over the last few years there have been numerous practice management articles on the subject of succession planning. And, as you may know, few advisers have done much about it. In sessions that I’ve conducted, I’ve asked advisers ‘How many of you have a succession plan?’ Typically, fewer than half of the advisers in the room will raise their hands. Even more telling, when I’ve asked those who actually have a written plan to keep their hands raised, most of the hands go down.  And, when asked to keep their hands up if their written succession plan includes a funding mechanism in place to actually complete the sale or transfer of the business, usually there are no hands left.

Why do so few advisers have a succession plan? Here are some of the most common answers I’ve heard:

  • Too busy building the business currently to deal with it
  • It’s too far into the future to think about now
  • Not sure what the business is worth, or will be worth
  • Haven’t found the right candidate to take over

The first two answers are really just excuses. Succession should always be an objective for a business owner no matter how busy you are or how far into the future it will be before you retire.  We don’t let our clients wait until the last few years before retirement to start planning, so why should we?

In an article in Investment Advisor Magazine’s January 2014 issue titled “Untangling Ownership”, Charles Farrell and Fred Taylor of Northstar Investment Advisors of Denver, CO understand the real issues.  “In order to build any kind of enterprise value, to be worthy of receiving some sort of buyout when you retire, you have to build a business not a practice”, says Farrell, CEO for Northstar.

And this is the issue. Most independent advisers, build a practice that is unique to them.  They market themselves and their own money management philosophy.  Advisers desire to show clients that they are unique in order to attract new business. But this ‘uniqueness’ can backfire on you because when you leave, your business is no longer about you. So, what’s left for your clients after you told them that you are the pied piper?

Farrell goes on to tell us that “Saying you have a practice that’s unique to you, the clients are tied to you, the philosophy’s tied to you; there’s really no way for anyone to buy you out because there’s no way to tell how many of those clients will stay, what sort of revenue you’ll generate, not a year or two out, but really 10 years out”. Why would another adviser want your mice? They must be retrained to follow him. How long will that take? What will it cost him? And, how much effort will be needed?

This is why many succession plans have to include a transition element as well.  The outgoing adviser has to remain on board for a period of time so that he can introduce his mice to the new adviser’s tune. (The transition is also usually necessary because no funding mechanism was put in place early on, so the adviser must accept a note for a portion of the purchase, which doesn’t give him all the cash that he needs to walk away cleanly and fulfill his own retirement plans.)

How do you avoid some of the challenges to succession planning? Unfortunately, it may not be possible for some advisers.  Charles Farrell mentions that many advisers who start their own firms are Type A personalities. “They don’t like to listen to other people. They don’t play well in groups.”  Many independent advisers leave wire houses or larger practices because they want to strike out on their own.  They want to avoid ‘managing people’ and dealing with all of the issues (i.e., hassles) that go along with working (or managing, or owning) a large firm. But, it’s the avoidance of dealing with those very issues that will also prevent you from turning your practice into an ongoing business that will have value after you leave.

If you want your business to have value, you need to build value throughout the life of your business by recruiting associates who will eventually become partners.  You’ll need a program to transfer ownership to those partners to provide incentive for them to remain with the firm (‘their’ firm). You’ll also need to change your thinking when it comes to making the business all about you, Mr. Type A, by creating an offering (including processes, communications, etc.) that will make clients loyal to the firm – rather than just you.

This is no easy task, and cannot be accomplished in the few years before you’re ready to retire. Just like we tell our clients, the sooner you begin, the more likely you’ll be to accomplish your objectives. I reccomend that you read this excellent article at thinkadvisor.com for more insights from a group of advisers who have been successful in creating a business that will be able to transfer value to its advisers when they are ready to depart, while retaining value for their clients who stay on.

So, what’s your firm worth, without you?  Well, that’s really up to you — but not just you.

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Are You a Pain Reliever?

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by George Ray

I was recently stung by a bee in my backyard (one of the most painful places on the body to be stung). I’ve been taking some pain relievers to lessen the discomfort, and it got me thinking about how financial advisers can provide pain relief to their clients.  In fact, I believe that there are two primary ways that we provide value to our clients — by creating gains and relieving pains.

In my last post, we briefly looked at the need for financial advisers to continue to innovate and adapt their business models in order to avoid being disrupted — or wind up like Blockbuster, Kodak, or Blackberry (maybe soon). I’m a big advocate of completing an annual SWOT analysis (and have lead adviser workshops on the subject) so that advisers can examine their current strengths, weaknesses, opportunities, and threats (SWOTs).  This can be one of the most effective ways to build (and update) your business plan for the coming year (if done correctly). And although the SWOT analysis can be effective, I believe that we now have a need (because changes are occurring so rapidly) to actually take a step back even further by re-examining our business models much more frequently.

One of the key business model building blocks is your value propositionIt must describe how your firm’s products and services create value for your clients. If you can’t clearly show a potential or existing client how you can create value for him, you really have no business talking to the client. Most advisers think about creating value by creating gains for the client (and I’m not just talking about investment gains). We often suggest that we provide better service (although we have difficulty defining what that means exactly). We might focus on the array of solutions that we have available. Or how long we’ve been in business. Or how many credentials we have after our names.

But your value proposition isn’t about you.  It should be focused on your clients. And your clients often have pains — financial pains. You can differentiate your business from other advisers by letting clients know that you can be a pain reliever. In fact, here are some questions to ask yourself about the pain relief ability of your value proposition:

  • Can you make your customers feel better by killing frustrations or annoyances that give them a headache?
  • Can you fix an underperforming solution from a competitor by offering better performance, higher quality, or new features?
  • Can you relieve the pain of difficulties and challenges that your customers encounter by making things easier or helping them get things done?
  • Can you help your clients sleep better by diminishing their concerns or eliminating worries about their finances?
  • Can you limit or eliminate the conditions that develop from common mistakes that clients often make?
  • Can you break down barriers that are keeping your client from adopting better solutions?

Take some time to think about your ability to be a pain reliever for your clients. Consider all of the things that you do to help them to improve their financial wellness, and help them avoid getting stung in the backyard.  It really hurts.