PLANADVISER - November/December 2021 - 32

practice management / succession planning
An internal succession appeals to many advisers, for
several reasons, Leung says. " We find that, often, the principals
of firms would ideally like to homegrow a successor, "
she says. " That's the least disruptive thing to do, and it
offers the most continuity for clients and staff. It also
allows the principal the maximum amount of control over
the process. [It's not necessary] to change anything about
the business, and the principal has the ability to determine
his or her ongoing role. There's a natural inclination to want
to do that. "
Opting for an internal succession over an external sale
brings with it some challenges, which advisers need to
think through as they plan. For those who have not already
been developing a next-generation leader for years, they
need to find that person. " The biggest challenge is that
talent is hard to find, " says Jeremy Holly, chief development
and integration officer at SageView Advisory Group
in Newport Beach, California. " Internal succession plans
are difficult: Even if you try it with someone, it may turn
out that you have not found the right person. Identifying
that person, and then developing them, is hard work. Star
advisers are hard to replicate. "
It is taking a big chance to
depend on a recently hired
adviser as a practice's nextgeneration
leader, and it creates
a " key-person risk, " says Jeff
Nash, CEO and co-founder
of
Bridgemark
Strategies,
a
recruiting and consulting firm
for financial advisers, in Charlotte,
North Carolina. " Internal
succession can be a good solution
if you already have a junior
adviser in place whom you've
been developing-and a better solution if you have two
junior advisers already in place whom you've been developing, "
he says. " But the scenario of bringing in a new
junior adviser can be too much risk for the selling adviser. "
He has seen instances of how badly that can play out,
from the junior adviser ultimately deciding not to buy the
business, to the person trying to steal the business, to the
person unexpectedly becoming seriously ill and needing to
be bought out of the equity stake.
Moreover, advisers need to keep in mind that a
successful internal succession involves years of work.
" That process takes upwards of 10 years or longer, " Nash
says. " Developing the junior adviser could easily take five
years. Then it often becomes a 'tranched' sale, so the
senior adviser is selling a bit of the business at a time to the
junior adviser over a number of years. If the junior adviser
is not willing or able to take a loan to finance the sale, then
you'll need to sell pieces of the business over time, which
is usually what happens. That tranched sale could easily
take five years, too. "
In most internal transactions, it is the owner who takes
all of the risk, because that person is basically financing
the transaction, says Rick Shoff, managing director,
adviser group at CAPTRUST in Doylestown, Pennsylvania.
" There are situations where the minority shareholder[-
i.e., the acquiring adviser-]has the means to get external
financing for a deal, " he says. " But, normally, the seller will
do a 'seller's note,' essentially saying, 'I'm going to give you
the equity, and you're going to pay me what the equity is
worth over time, out of the operating profits of the business.' "
Because of the lengthy payback schedule and the
fact that the profits are the source of the payments, " it's
risky, " he says. What happens if the business hits a bump
in the road, and profits decline?
OPTING FOR AN INTERNAL
SUCCESSION OVER AN
EXTERNAL SALE BRINGS WITH
IT SOME CHALLENGES, WHICH
ADVISERS NEED TO THINK
THROUGH AS THEY PLAN.
Further, in an environment of rapid consolidation, with
bigger advisory businesses achieving scale and developing
an increasing depth of talent and capabilities, choosing
to remain independent may make it harder to attract and
keep clients. " There's a lot of M&A activity in the space, "
says Vince Morris, president of OneDigital's retirement and
wealth division, in Atlanta. " In any industry, when it starts
to consolidate, scale begets scale. At some point, you've got
to wonder, 'Are we going to be able to keep up with what
the larger firms can offer?' "
The next-generation advisers need to benefit more than
the senior adviser, Shoff says. " If you do a sale, you have to
be able to go to your employees and your clients and answer
the question, 'Why did you do this?' The answer better be,
'I really believe this is better for you,' " he says. " Doing an
internal sale is really just because you want to leave the
business. You're not changing anything about the services. "
Preparing an Effective
Internal Succession Plan
Advisers who want to put together an internal succession
plan can take these five steps to doing it effectively:
* Allocate enough time for planning. " Succession plans
can be complex to think through, because there are about
30 different components, " DeVoe says. " Often, advisers
start with the best of intentions, thinking that doing the
plan is something they can knock out in a weekend or two.
But then they realize, 'Wow, there's much to consider.' "
It is better to start soon and work on the plan a bit at a
time, rather than intending to tackle it all sometime in the
32 | planadviser.com November-December 2021
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PLANADVISER - November/December 2021

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