Building Generational Bridges Protects Your Firm’s Value


Succession planning for small- to mid-sized advisory firms is a hot topic. With equity markets at historical highs and the average age of the principals over 51 (according to Schwab Institutional), these two key metrics work together for a ripe M&A market over the coming 15 years.

Often overlooked in this analysis is the greatest risk to future valuations: the potential collapse of the client base. This collapse arises from a counter set of conditions to an advisory firm owner (or potential acquirer) as they consider the future: upon clients’ wealth transfers, too often the downstream generations go elsewhere for advice.

A Valuation Discount?
The typical small- to mid-sized firm has a client base heavily skewed to clients over 60 years of age. Right now, clients’ circumstances, needs, and anxieties are shifting from wealth accumulation to distributions and transfers. Meanwhile, clients’ children, still heavily in the wealth accumulation phase, are forging ahead with a much more diverse advisory solution—one part professional and one part do-it-yourself.

A 2013 PWC report, titled Navigating to tomorrow: serving clients and creating value had this to say about an adviser’s diminished family connections “In the case of transfers to children, the retention rate remained stable at 51%.”

Essentially, it’s a coin flip whether children’s transferred assets remain with the parents’ adviser and, should this ratio continue, it bodes poorly for a firm’s future valuation as current assets erode as generational transfers take hold. Whether it’s a multiple on AUM, cash flows, or pre-tax earnings, a firm lacking a credible, cross-generational relationship program risks a discount applied to its valuation.

Protect Assets . . . and Valuations
In the June 2013 Schwab Independent Advisor Outlook study, 95 percent of respondents agreed about the importance of pursuing children’s inherited assets. Should this pursuit come at the point of inheritance, then the effort appears opportunistic and disingenuous. The children will walk away.

This needn’t be the case as there are both process and structural tactics that smooth the way to substantive multigenerational relationships long before the wealth transfers.

Process: Create leveraged programs (for example, group meetings open to all clients and their families) that demonstrate care and concern for a family’s broader needs and interests. These suggested seminar topics are pertinent to all generations and establish your firm as go-to educational resource:

  • “Protecting digital assets”
  • “End-of-year tax planning”
  • “Investing based on a family’s values”
  • “Basics of money management”
  • “The benefits of budgeting” (useful for grandchildren too)

In addition to presenting information, include worksheets or checklists to forge an action-based orientation. These worksheets offer an opportunity to engage the children in more substantive advisory conversations.

Next, expand your annual client review program with a specific agenda for the children. There are a couple of ways to handle these meetings:

  • Invite the children to the parents’ annual review meeting (with the parents’ permission, of course).
  • If the parents want to conduct their own family meeting, prepare a turnkey package with an agreed-upon agenda and the necessary reports and documents. Taking this extra step confirms to the children that you’re leading these family communication initiatives.
    • To spread meetings across the year, schedule planning updates that also include a review of the parents’ end-of-life documents. Showing sensitivity and attention to these directives give evidence that “Mom and Dad” are more than a business transaction to you.

Structural: The financial and wealth plan’s implementation brings important tools that formally connect the generations; these connections naturally lead to relationship-building meetings with the children/beneficiaries.

  • Trusts, in their various forms, work across generations. Trusts deliver a robust package of financial and quality-of-life benefits that demonstrate your expertise and commitment to do what’s in the parents’ best interest and how those decisions flow to the children.
    • It is productive to review each trust’s provisions annually, particularly with those trusts listing the children and grandchildren as beneficiaries.
    • Expect one or more children will be appointed trustee, successor trustee, or trust protector. Coaching sessions with these children in legal and financial knowledge, as well as a run-through in accessing important documents, are additional service areas (and expressed as trustee/executor concerns in a 2013 U.S. Trust study).

Creating Multigenerational Habits
Setting both process and structural communication programs with clients’ children demonstrates an awareness of a family’s wealth and values; this builds relationship bridges. And, diligent documentation of this program represents vital evidence that an acquirer’s purchase of existing AUM will be rewarded as clients’ children—and their inherited assets—remain.

Kirk LouryKirk Loury
General manager, The Advisors Forum
Practice development, WealthCounsel

4 thoughts on “Building Generational Bridges Protects Your Firm’s Value

  1. Excellent recommendations, which not only benefit the client and advisor, but at the point where the wealth transfers the process is in place for a smooth transition. Beneficiaries will appreciate such advance planning and the peace of mind that comes along with not having to deal with complicated financial issues at an already stressful time in their lives.

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