How to Recruit a Gen-X Successor on Your Own

Choosing a successor isn’t the easiest decision. Advisers commonly choose to partner with an RIA rollup or aggregator firm setting them up with a built-in succession plan. Nobody can argue with the convenience, but I’m not convinced this is the best option 100 percent of the time. If you’re looking to find a talented Gen-X successor to take over your business, there are plenty of solid candidates out there and it may give you more freedom and control than an institutional partner. Here’s what to keep in mind if you’re going this way.

Y Does Not Equal X

The financial planning profession and financial services industry is enamored by the “next gen.” While this term is intended to mean anyone younger than the baby boomers, all nex-genners are not equal. Although thought leadership is abuzz with talk of the millennial invasion, I think the best opportunity to find a great successor lies within Generation X.

Generation X is roughly defined as the cohort of people born between the early 1960s and the early 1980s which puts then at about approximately 39 to 59 years of age. According to the Bureau of Labor Statistics, there’s nearly as many Gen-Xers and Gen-Yers in the workforce—the difference isn’t that substantial—and according to Cerulli Associates, Gen X is going to be handed down $68 trillion in wealth over the next two decades or so. I would look for a Gen X-successor, someone who can relate to this population because he or she is a member of it.

Just look at where Gen X is now compared to Generation Y. They’re qualified investors now, have less of a debt abyss to navigate themselves out of, and are ripe for financial advice given that they’re at a more mature stage in their lives.

Yes, we all know that according to the numbers the wealth transfer to millennials is going to be the largest in humankind or however the saying goes. Sounds great! However, we aren’t there yet. At this point it’s all theoretical and the Gen-Xers are the ones upgrading their houses.

What to Look For

How do you know a candidate for a successor is a good one? Look at the adviser’s ability to develop new sales completely from scratch instead of through word-of-mouth or referral. While many advisers will boast that they love business development, the reality is that a small percentage of them actively develop leads. If your ability to retire happily with money to spend on the grandkids depends on another person’s ability to drum up sales, you’d better make sure they have the ability to snag a deal from thin air while the market is crashing down. Elsa, Anna, Olaf and all the rest of the Disney paraphernalia can get quite pricey after all.

Sales ability is the most important thing you can look for in a candidate. All other skills (practice management, technical competency, analytical prowess, to name a few) can be learned or bought. Successors who can sell, no matter what price tag they come with, are inexpensive; successors who can’t sell are one of the most expensive investments you can make in your business.

Questions to ask include:

  • What sales training programs have you completed?
  • How often do you engage in sales training?
  • Pretend I’m a prospect you’re cold-calling and pitch me a seat in your retirement seminar.
  • How many leads a year do you receive from COIs and how do you go about developing those relationships for mutual benefit of both parties?
  • If you had to find 10 new clients in a month from today, where would they come from (if you couldn’t get referrals from your existing base or people you know)?
  • How are you using technology to prospect, pitch and close a sale?

Finding the Successor

Now that we’ve established that you want a lean, mean, Gen-X money-making machine, how do you go about finding one?

Take advantage of your vendor relationships. Here’s where your vendor relationships come into play. Why? If the vendor is selling to you, they’re probably selling to other advisers. And if those other advisers are doing well enough to pay the same bill you pay, they must be doing something right. Call up the sales rep who sold you the product and have a talk. I’ll give you some names of firms who do a lot of business with our industry: Miller Canfield, Deckert, Black Diamond, Vestmark, Riskalyze, Orion and eMoney Adviser, among others.

Target industry organizations that you may be a part of or be able to access as an outsider. For example, the CFA Institute has a member directory and several LinkedIn groups for its local societies and member committees. These groups have tens if not hundreds of thousands of members on LinkedIn. In some cases, you don’t actually need to have the designation to become a member of the LinkedIn Group. For example, I am a member of the Certified Financial Planner (CFP) group on LinkedIn although I do not hold the designation. You never know whom you can meet online—start posting up!

Tap into the power of the network. Some events by the CFA Institute are for members only while others are open to the public. I’ve used these directories several times when I needed to find the right person for a business need I had and met with great success. Crack them open and start talking. If you are a member of CFA Institute or the Financial Planning Association, utilize your time at organization events to make connections with potential successors.

Try communicating with media influencers (or their staff and affiliates). You just never know who brilliant minds are connected with and what they’ll come up with if you ask. Have you ever been interviewed by a reporter? Do you know the editors of any financial magazines or can you get introductions to any? These people tend to know what’s up and know a ton of folks in the business. It’s always good to be in touch with the media anyways, right? I’ve met several powerful people this way.

Getting the Deal Done

On the flip side, what can you do to increase your attractiveness to a successor? Ask yourself if your brand is really friendly to people from the next generation. They tend to favor a less formal dress code and opt for higher work life balance. Are you offering Kashi and granola bars in your kitchen or is it more your style to swing by Dunkin’ Donuts to pick up a stash to share with the office breakfast meeting? Get acquainted with Whole Foods.

And while you’re at it, a healthy diet of social media can’t hurt. A strong digital presence, including a Gen X and Y friendly website, will work in your favor. When was the last time you posted a selfie to LinkedIn? Bring on the blogs and instant messaging.

Think about your office décor as well. Consider some comfy bean bag chairs and a treadmill nook instead of a stuffy mahogany-clad conference room. How Google of you!

This is probably the biggest transaction of your life; but it’s not going to be insignificant for your successor either. So whip out the MoneyGuidePro and create a financial plan for the successor’s next 30 years. Not only will this clear up any fuzzy expectations, it will also reduce uncertainty in his or her mind. Just like all you advisers say on your websites, a financial plan is the key to happiness and peace of mind.

Or however that cliché goes…

Sara Grillo

Sara Grillo, CFA, is a top financial writer with a focus on marketing and branding for investment management, financial planning, and RIA firms. Prior to launching her own firm, she was a financial adviser and worked at Lehman Brothers. Grillo graduated from Harvard University with a degree in English literature and has an MBA from NYU Stern in quantitative finance. See her website at www.saragrillo.com.

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RIA Transitions: What Gets in the Way

We pretend that transitions are just financial transactions when, in fact, they are a highly emotional event for RIAs. The reality of any transition deal is that advisers must give up control as well as equity to transition successfully, thereby gaining freedom, peace of mind and time for the things that matter most to them. This is easier said than done.

Whether it’s a merger, a sale or an internal succession, transitions reveal a subconscious labyrinth between an RIA’s head and heart. Approximately 80 percent of RIAs say they want a succession plan, yet only 20 percent execute one successfully. A recent Schwab comment notes that in order to become part of that 20 percent, you need to be fully aware of the forces that will support you, or thwart you, starting today.

If you’re a fee‐based, independent adviser who’s been taking care of your clients’ portfolio management and financial planning activities for years, there’s now an entire industry of consultants, seminars and services vying for the opportunity to assist with your transition plan. Their guidance is overwhelmingly focused on the deal structure and the numbers. While finance is our comfort zone, let’s be candid: the basic math is mental cotton candy that can be worked out in a few minutes on a cocktail napkin. But if the math is so easy, why are there so few “successful” transitions?

RIAs don’t sell their firms for three reasons that are, for the most part, entirely subconscious:

  1. You don’t have financial freedom
  2. You can’t sell your kids to the devil
  3. You resist losing control

Any one of these things can blow up or ambush a deal, effectively delaying your ability to move on to your next chapter. Advisers frequently spend months dancing around the truth of these issues only to walk away at the eleventh hour. Alternatively, their discomfort may emerge months later, and they’ll unwind the entire transaction.

Transitions with positive outcomes are entirely possible. Becoming part of the 20 percent will require you to call subconscious beliefs out into the open before they undermine you, then handle them with skill, empathy and respect.

Reason No. 1: You Don’t Have Financial Freedom

Despite our training as financial professionals, many of us struggle with acknowledging the truth about our own financial freedom. Generally, if you are a state-registered advisory firm, the net proceeds after tax won’t give you financial freedom unless you’ve already built a big, fat nest egg. If you’re a federally registered firm, your net after tax may be large enough to give you financial freedom, but the rate of return on your liquid assets is probably well below the money that your firm was paying you both directly and indirectly. In other words, a transition is a far cry from the massive payday everyone imagines.

It’s tough for advisers who find themselves in this position since they must replace the relatively comfortable incomes they previously drew from their businesses. They have to keep working to achieve their financial goals, usually by joining the buyer’s firm. Many advisers react to this realization by retreating from any serious discussion of transition altogether. They go into hiding, both intellectually and emotionally, until circumstances beyond their control force them into action.

However, joining the acquiring team can be positive as well as profitable, especially if the cultural fit is strong. When a longtime adviser with a smaller practice joined our team, our dialogue was as much about the similarity of our “work hard, play hard” cultures as it was about the financial gain he would enjoy by continuing to work as an adviser with us. We both have observed that the additional revenue he generates is creating great value for our clients, for him and for the firm.

Reason No. 2: You Can’t Sell Your Kids to the Devil

For many RIAs the transition of their clients is a defining moment. It’s highly personal and eclipses the value of the portfolios. They see themselves as trusted, hands‐on managers who are concerned with details and decision‐making; something they’re able to do with the support of loyal staffers who are wired to care about their clients the exact same way.

These advisers are very protective of their client relationships and skeptical that anyone else can take care of those relationships as well as they can. Some openly question whether bigger is better, thinking that it means a loss of the personal touch they delivered so effectively. They may view their potential suitors with mixed feelings, or even a negative bias that casts an acquiring firm in an oppositional role.

Of course, not all transition partners are the devil, and clients are quite capable of moving on to new advisory firms. But we’re talking about the subconscious mind where perception is frequently mistaken for reality. These advisers are in a mental trap. They can’t move on because they believe they’re selling their clients out. Yet not going forward keeps them on a treadmill with no transition plan and no positive outcome in sight.

Transitions only work for these RIAs once they’re confident that their clients will be well taken care of and happy. This requires sincere effort to establish a shared set of values with the new firm. A veteran adviser who merged her practice with ours was a fine example of this. Integrating her practice was much like getting engaged and married, then learning how to live together. We laugh about it now, but it took commitment on both our parts to understand each other and be honest in our communication. That meant a tremendous amount of talking about financial as well as non‐financial issues. The outcome has been well worth it for our clients, for her and for the firm.

Reason No. 3: You Resist Losing Control

Of the three, this one is the most subconscious and complex. RIAs say they want to sell or transition. They want to move on to their next chapter, whatever that looks like for them. But it’s rarely that simple.

Independent, fee‐based, registered investment advisers are a special breed. They spend years building their firms and taking extraordinary care of their clients’ wealth. As self‐made individuals, they’re used to being masters of their own universes. They are brilliant at what they do and will sometimes partner up in business if they find the right match of skills sets. Call them mavericks, or specialty acts, or whatever you wish. It’s often a challenge for them to release their old identities and join a new team, especially one that might ask them to embrace different ways of operating.

To transition successfully, advisers must give up control and equity in order to gain freedom, peace of mind and time for the things and people they love most. This is especially true for RIAs who have enjoyed their advisory careers and simply haven’t given much thought to what they’ll do the day after the deal is done.

Consciously designing that next phase is the key to being happy with the entire process. When you’re conscious, it allows you to be confident in your decision-making process. When you’re not, the subconscious issues that are lurking in the background will complicate your plans.

The co‐founders of my firm (who also happen to be my father and older brother) both embraced the idea of an internal transition, and it occurred very intentionally. They ceded decision-making over time while doing what they each enjoyed; for my dad it was stock research and client relations, whereas for my brother it was pursuing a new career. Not all family successions occur so smoothly. This one worked because our values were aligned, and we shared a vision for the business that allowed them to give up control and experience freedom. This ensured the best possible outcome for our clients, for them and for our firm.

What Do the 3 Reasons Mean for You?

Transition is a deeply emotional process, not simply a financial one. If you want to move past the subconscious barriers that can undermine yours, then let your rational mind stay busy with the trade journals, while the rest of you considers the truth of why you’re not moving forward with a deal.

I urge advisers to listen to their hearts as well as their heads in order to do what’s best for both their clients and themselves. Doing so will effectively disarm the three reasons I’ve identified and create a new level of mastery for advisers who are ready to embrace their next chapter.

Ryan Kelly

Ryan Kelly is CEO of Spectrum Asset Management, Inc., an RIA in Newport Beach, California, that is a second-generation family firm. Since 2012, Kelly has successfully led Spectrum’s acquisition of three right-fit independent advisory firms and continues to look for similar opportunities.


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Heed Your Own Advice: Plan

Research released yesterday from the Financial Planning Association and Janus Henderson titled, “The Succession Challenge 2018: Why Financial Advisers Are Failing to Plan for the Inevitable,” showed that financial advisers aren’t doing all the things they’re telling their clients to do when it comes to succession planning.

The research found that the number of financial advisers who reported having a formal succession plan in place has actually decreased from 28 percent in 2015 to 27 percent in 2017.

The research brought to light some reasons behind why advisers aren’t planning properly and also some interesting findings on how advisers in big firms differ in their succession planning from advisers in smaller firms.

Why The Lack of Planning?

There are several reasons why advisers are reluctant to plan for the next stage, the research found. Here are the top areas that presented the biggest challenges to succession planning:

Strategic. Fifty-one percent of planners said the biggest challenge was finding the appropriate successor or partner.

Michael Futterman, assistant vice president of Janus Henderson Labs professional development team, said this was a surprising aspect of the research findings—that advisers were not focusing on valuation but on finding the right successor.

“While valuation remains an important aspect of succession planning, it’s a math equation,” Futterman said. “The more challenging question of who [is the right successor] is one that cannot be answered with math.”

Personal. Twenty-two percent of advisers said personal concerns were an issue. This could be because it’s not easy facing retirement. Maybe planners are scared or don’t know what they want to do in retirement. Maybe they’re concerned about their health, or that they’ll be antsy and restless.

“While finding a successor is clearly an important challenge, the data suggests that personal challenges play a big role for advisers when thinking about the future,” the research report said.

Structural. Fifteen percent of advisers said they weren’t planning for business succession because of reasons like structuring the business to maximize value, the research found.

Mechanical. Twelve percent of advisers said the mechanics of developing and executing a succession plan was their biggest challenge.

Bigger Firms Plan Better than Smaller Firms

The research found that 60 percent of advisers in firms that have $500 million or more in assets under management had a formal succession plan in place.

“I think that these advisers have grown because they see their business as a business—and they treat it accordingly—or at least in greater percentages than those that might not have been successful, Futterman said. “They are interested in leaving a legacy and providing support for clients.”

However, only 13 percent of advisers in firms with less than $50 million in assets under management has a formal succession plan in place.

“The smaller adviser is likely struggling and does not see a horizon where succession planning is important or imminent,” Futterman said.

Just Do It

It all boils down to this: you simply need to start planning, no matter what type of challenge you’re facing and no matter whether you work at a large or small firm.

“Plan early, often and with options in mind should your circumstances change,” Futterman said. “If you don’t take control then someone else or something else will.”

Editor’s note: Download the Janus Henderson Investors and FPA research here. If you’re looking for additional resources to help you with succession planning? Click here for more from Janus Henderson Investors. Also, Michael Futterman will present an FPA webinar titled “The Succession Challenge: Why Advisers are Failing to Plan for the Inevitable” at 2 p.m., EST on May 30. Register for that webinar here. Stay tuned to FPA’s Research and Practice Institute for two white papers diving deeper into the research findings in June and July.

Ana Headshot

Ana Trujillo Limón is associate editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org. Follow her on Twitter at @AnaT_Edits.