Prospera Financial Services, Stratos Wealth Partners and Stifel Independent Advisors Provide Guidance to a Financial Advisor Whose Children Aren’t Ready for Succession
By Julius Buchanan
January 12, 2022
The grand finale of a financial advisor’s career is succession – when decades of hard work and diligent attention to client needs converge on a focal point that will make or break your fortunes, the inheritance you bestow on your children and the legacy you leave your clients.
This is especially the case for independent financial advisors, for whom transitioning client relationships while monetizing one of their most valuable assets – their businesses – are twin concerns.
For most people, the end of your career is so far away – until you realize it isn’t. Just as clients often recognize the need for planning shortly before retirement, independent financial advisors can easily fall into the same trap.
That myopia increases when the plan rests on the shoulders of your children, because your hopes and dreams for your heirs can cloud your judgment and distort otherwise solid business acumen.
Which brings us to today’s Ask the Experts Panel, where we explore possible solutions for an advisor with clients who are skeptical of the adult children taking the reins of the business.
Our Expert Panel Participants – Prospera Financial Services, Stratos Wealth Partners and Stifel Independent Advisors
We are grateful to the following industry leaders for sharing their advice:
Hilary Pluemer, Director, Advisor Services at Prospera Financial Services, the Dallas-headquartered independent broker-dealer and corporate RIA serving 163 advisors with $16 billion in assets under management.
Lou Camacho, President of Stratos Wealth Partners, the Ohio-based wealth and financial management firm and part of a network of firms with almost $19 billion in assets supporting over 330 financial advisors.
Tim Boostrom, Director of Business Development at Stifel Independent Advisors, an independent broker-dealer with $4.4 billion in assets under management and 95 affiliated advisors, and subsidiary of Stifel Financial Corp., the global investment bank and wealth manager.
Without further ado, here’s the anonymous question from a member of the WSR community who is an independent financial advisor business owner:
I’ve worked extremely hard over the last three decades building a solid independent financial advisory business in the suburbs of a large metropolitan area. We’re a dual registrant firm, working as registered reps and IARs with a large independent broker-dealer and corporate RIA. We have about $360 million in client assets, split evenly between brokerage and fee-based advisory accounts.
Our team includes four financial advisors (including me), and two of them are my adult children. Realistically, I have another two years of productive working life left, at the most.
I’ve always wanted to retire by passing the business to my kids, and a big reason why is because thought it would be easy since I wouldn’t have to find a buyer or M&A partner: I would simply transition my kids into management over two or three years, leave the business to them in the will, then let them call me if any massive problems ever come up. My kids have never objected to this vision.
But last month, I finally mentioned my plan to one of my clients – who is also a trusted friend from college – and received a shocking response: “I’m not sure I’m comfortable working with your kids. They just don’t seem to have the same fire in the belly as you.” I canvassed a few other trusted clients, who all gave similar feedback.
In retrospect, I should have seen it coming. My children are both securities licensed professionals, ages 32 and 36, and I was so proud when they followed in my footsteps.
They do good work helping me with the nuts and bolts of the business and have saved me from hiring more non-family advisors, but they don’t show much passion or excitement about their work. What’s more, I’m always the one reaching out to prospects because my kids just don’t take the initiative.
I’m afraid that I viewed my children through tinted glasses, placing my excitement and entrepreneurial spirit on them rather than seeing them for who they are. Now, I’m left wondering what can be done to salvage the situation.
Will heart-to-heart chats help or cause chaos? Should I postpone retirement? Or merge with another firm and make my kids minority shareholders? I feel like the proverbial ostrich – everything looked great with my head in the sand. Help!
Hilary Pluemer, Director, Advisor Services, Prospera Financial Services
My short answer is yes – delay retirement. A realistic and solid succession plan prior to retirement is important to avoid losing your clients to other advisors, thus leaving no business for anyone to continue.
I’d suggest scheduling uninterruptible time with your kids to have an honest discussion. Share some of your clients’ concerns without letting the conversation feel like personal attacks.
There’s a certain style of relationship that you’ve trained your clients to expect, and some hard decisions ahead. Approaching the dilemma as a collective decision will help everyone feel they are a part of moving forward.
It’s possible that your kids want to be trained to operate in a way similar to you. Have you had honest conversations with them about their perceived lack of hunger with prospects?
It’s also possible that this isn’t their passion, and they don’t want to disappoint you. This may be their opportunity to explore other fields, leaving you free to transition your business to someone who would treat it as you have.
In short, be honest and get them involved in the long-term planning. If they are given a voice, they’ll still feel ownership of the business’s future – a winning proposition for both your family and your business.
Lou Camacho, President, Stratos Wealth Partners
You don’t need to hit the panic button just yet. First, take a moment to appreciate that you’ve built a strong business with loyal clients who are willing to be honest.
From there, give your kids the same benefit of honesty, sharing the concerns that your clients have surfaced with you and addressing this key question: Whether or not running the family’s wealth management business is really something your adult kids want. You should listen and give them the floor to talk through their thoughts.
If this confirms that your current succession plan won’t work, there are strategies that enable you to maximize the value of your business for your own retirement purposes, provide your kids with a soft landing and position your clients to be well served, even with less than two years left:
- Challenge and Develop Your Children: Discuss client concerns with your children and challenge them to prove that they’re up for the responsibility of running the firm. Take the two years to develop them into roles that provide an opportunity to deliver the highest level of contribution to the firm. Planning ahead and gradually elevating successor advisors contribute to a seamless and successful transition. Consider enlisting trusted clients as advisors to identify areas for improvement.
- Outside Successor with Minority Shareholding to Heirs: Find an outside successor with the talent, infrastructure and ability to take over the business and maintain client confidence. The partner should acquire a controlling interest in the firm while allowing the heirs a minority interest. Structure the transaction so that you receive a material amount upfront and the heirs’ shares have additional upside over the long term.
For example, structure the transaction so that the minority shares can be sold to the buyer at an enhanced multiple if certain EBITDA targets are met, incentivizing the heirs to focus on long-term profitability.
This would provide liquidity for your near-term needs, lock in the current share price for the heirs and provide additional upside over the long term.
Regardless of which path you take, it will be crucial to align with a well-resourced firm that has an established track record of success in executing these types of transactions.
Tim Boostrom, Director of Business Development, Stifel Independent Advisors
Successful advisors like you naturally build a book of clients over time who share their traits. Since your kids don’t have your personality and “fire in the belly,” many of your clients may not have that same bond with them.
One solution is a direct replacement – give minority stakes to your children and hire a figurehead who possesses your traits. However, this risks personality clashes within your team and hurt feelings with your children. There’s also no guarantee that the hired FA will mesh with your clients.
The second solution is “sell and stay.” You continue to work with your top 10-20 clients – since they generate most of your revenue – and your kids take the rest. You should be able to work one to two days per week for about a year, mostly meeting with those top clients and introducing your children to them – to showcase their abilities. You might find that you’re able to continue in this reduced capacity for several years.
You’ve been coaching your clients for years to think differently and follow your guidance. If you believe that your children are the best choice going forward, then provide that information to your clients. Be prescriptive – they will listen.
Next Ask the Experts Panel
Thanks to Hilary Pluemer, Lou Camacho and Tim Boostrom for providing their thoughts and guidance on this reader’s predicament.
If you know someone transitioning their business to adult children, please considering sharing these experts’ advice with them.
As regular readers know, we frequently host Ask the Experts Panels across different topics and scenarios. If you find yourself or an industry friend in a difficult situation, drop us a note. We will find your answers and, of course, always keep your identity anonymous.
Thanks for your support, and we look forward to delivering another Ask the Experts Panel for you soon!