To start with, let's define the term "Contingency Planning."

Building a successful independent financial advisory firm that can support the firm’s key stakeholders is a significant accomplishment. But building a successful firm is the first milestone, not the end of the journey. Once the firm is established and stabilized, the next milestone should be to create a sustainable enterprise. This goes beyond figuring out the service and pricing model, attracting and retaining loyal clients, solid branding, and a trustworthy reputation.

Starting your business as a financial advisor is an exciting prospect. You're setting the foundation for a successful future and commitment to growth. Whether you are creating a platform to last the duration of your career or working to formalize/upgrade your established enterprise,effective entity planning and setup will serve as the base on which you can build and hopefully as a springboard for future generations.

But there are important considerations to navigate when setting up an entity that are almost always overlooked and go beyond using your state’s website or an online filing service to establish an entity. 

Strategies to Fortify Employee Retention and Minimize Advisor Turnover

In the fast-paced and competitive realm of financial services, the role of employee retention strategies has never been more critical for registered investment advisors. Independent advisors understand that retaining a skilled and dedicated team is as essential as acquiring new clients and expanding services. This article explores the multifaceted world of employee retention, providing insights into what the most effective advisory firms are doing today.

The decision to form an entity structure for your financial practice is a critical step for experienced independent financial advisors. Many advisors address this topic after a specific need for it has arisen, but addressing it proactively allows you to establish the right structure with less stress and take advantage of numerous other benefits along the way. This article highlights the signs indicating when it's time to establish an entity and the risks associated with not doing so.

If you follow us on social media or are a subscriber to our monthly newsletter, you’ve heard about the most recent update to our one-of-a-kind client servicing platform, myCompass. Our latest and largest expansion now facilitates all services that SRG provides to clients, ensuring a streamlined and secure experience. Since these updates are still fresh, let's dive into the benefits of myCompass and how it can take your projects with SRG to the next level.

If you’re showing up to virtual presentations or conferences, you’ve likely noticed a recurring topic that's been buzzing around the industry: teaming up and preparing for a potential merger. Hopefully, you’ve sat in on a few of these discussions, and if you’re reading this you’ve probably considered a teaming scenario to some extent. Many advisors we’ve worked with find the concept intimidating, however, with the right approach and some careful planning, you can navigate this process like a pro. So, let's dive right in!

You’ve decided to put your exit strategy in motion. Maybe you’ve identified a buyer, or you’re considering multiple successors who’ve expressed interest in your practice, or you just decided an hour ago that now is the time to sell. At whatever stage you’re in, your top priority is to protect your clients and deliver a smooth transition that they’ve come to expect after years of working with you. 

Most experienced business owners understand valuations as an essential tool to assist in making critical decisions for their advisory practice. Unfortunately, many advisors will invest time and effort in getting their practice appraised, only to find out that the underlying analysis is irrelevant to the specific purpose of the valuation.

For anyone who has siblings, or is raising siblings, you might be familiar with the “Fair Share” tactic. Two siblings are told to share the last cookie in the jar. One sibling is tasked with splitting the cookie, while the other gets to choose which half of the broken cookie is theirs to enjoy. Doing so ensures that each sibling gets a fair share of the treat, despite their personal interest, with minimal bickering in the end.  

Many companies have spent significant time and effort in recent years to move away from the traditional one-size-fits-all type compensation plans and instead favor a more customized solution. However, the challenge to achieve desired results in attracting and retaining talented workers, within company means, remains prevalent. While at times the issue may be poor job role, poor culture fit, or external circumstances beyond the employer and/or the employee’s control, more often than not the lack of success is the result of a misalignment of the compensation plan with the worker’s role in the company and incorrect implementation practices.

Most of these occurences can be avoided if the following best practices are maintained:

Hiring and retaining talented employees is a top priority for most business owners. Effectively doing so has become increasingly difficult in the financial services industry. The number of advisors approaching retirement and exiting the industry far outweighs the number of new advisors joining. This gap is further exacerbated by the Great Resignation. As a result, organizations are struggling to find the human capital needed to grow their business and plan their internal succession.  

Whether you are just starting out as a financial advisor or you are simply looking to expand your established business, buying an existing book of business could be the right move for you. Opportunities for business acquisitions are becoming ever more common, as the average age of many financial advisors edges closer to retirement.

As an incentive to motivate hard-working key employees, private employers can issue phantom stock, also known as “shadow stock,” as equity compensation. While the value of these phantom shares will rise and fall in line with the company’s stock, the employee will not gain any actual ownership over the company or minority shareholder rights.

Those employed as financial advisors will likely come to a time in their career where they would like to make a vertical move. Once this stage is reached, there are few clear paths available. Some may decide to dig their heels in and open their own financial advisory firm, scrounging up clients where they can and providing the best possible service to ensure the success of their practice.

The pandemic has not only upheaved our personal lives over the past year and a half but it is doing the same to our professional lives as well. The U.S. Bureau of Labor Statistics reported that 4.3 million Americans (2.9% of the entire workforce) quit their jobs in August. This is another record-breaking month after the previous record-breaking months. At the end of July, there were 10.9 million open positions in the U.S. In a survey conducted by Morning Consult for Prudential in mid-September, they found that 46% of full-time employed U.S. adults were either actively looking for or considering a new job search. Why have so many workers decided to forge a new path and call it quits with their current employer? And what does it mean for small business owners?

On August 24, 2015, the SEC implemented FINRA Rule 2040. This rule is related to whether and how people who are not registered as broker-dealers can receive compensation that derives from financial transactions.

As any employee knows, there’s more to hope for at a job than just the salary. One of the biggest factors of whether or not someone will accept an offer is the benefits package. These are the things that help them feel supported in ways beyond their paychecks, and they can have a huge impact on employee experience.

As a business grows and develops, there may come a time to consider selling it. You might even be approached with an offer. And while plenty of owners decide they are happy to continue forward at full steam, there are good reasons to think through all the options.

While it is easy for publicly traded companies to know their valuation, only around 1% of businesses are traded on the public market. All the rest are privately held, and for them, the prospect of knowing how much their companies are worth is far more challenging.

As much as we would like to just balance our revenue and expenses, there are a lot of reasons for businesses to know their valuation. To understand your business valuation, you need to determine the value of all of your assets — things like the fair market value of company stocks, fixed assets like buildings or equipment, and intangible assets like brand recognition or customer lists.

Companies offer a wide range of employee compensation methods. Generous salaries, healthcare plans, and PTO are among the most common, but many companies also offer compensation that doubles as an incentive for high performance and long-term commitment. Equity compensation is just one example — but it takes a lot of different forms that are worth exploring.

Outlining strategic objectives and planning for the company’s future with a solid succession plan are both tasks that every business owner should undertake at some point. However, simply doing it doesn’t guarantee a successful transition plan; succession planning poses many challenges and potential pitfalls of which financial advisors need to be aware.

The exact details of a succession planning process are determined by the size of the firm and the urgency with which successors need to be chosen. With an aging workforce, the need for speed is greater. It is less pressing when key positions are filled by younger executives.

What Is the Due Diligence Process?

With any merger or acquisition (M&A), there is a level of risk and uncertainty involved with every deal. As a buyer, one of the best ways to mitigate this risk is to get a full understanding of the target company being considered. This is highly important because once a transaction is completed, any issues that the selling company has been experiencing are now the buyer’s responsibility. This is where the due diligence phase comes in. 

Merger and Acquisition Modeling

Prior to an acquisition or merger, a merger model (a type of financial modeling) will be used to analyze the combination of the two companies in a proposed deal. The primary objective of M&A modeling is to determine how the acquisition may impact the earnings per share (EPS) of the acquiring company, and how this EPS would compare with others in the same industry. However, M&A models can offer deeper financial insights in any given deal. The financial insights and projections arrived at within the model can help inform whether or not to proceed with a merger or acquisition.

What is Merger and Acquisition Strategy?

Before pursuing a merger or acquisition (M&A), there must be some reflection on how a business intends to leverage an M&A to meet its business objectives. Merger and acquisition strategy allows a business to set a group of parameters to consider and assess to identify M&A opportunities and then determine the viability and value creation potential of any deal.

Liquidation rights, also known as liquidation preferences, are a key element in contract negotiations for mergers and acquisitions. They determine who gets paid and when should a company choose to sell or liquidate all its assets.

As a small business owner, you are a go-getter with a well-thought-out plan for your company. The opportunity to grow and expand your company via acquisition and innovative marketing efforts is the next logical step in your plan. Or do you prefer a different path?  One that involves more sand between your toes and less ink on your fingers. You are ready to pass your small business onto the next generation and shift your focus to more relaxing endeavors. But there is so much involved in the process of buying and selling businesses. The integration of technology innovations in the world of mergers and acquisitions (M&A) is striving to revolutionize M&A deal-making processes. 

While financial advisors get paid for helping their clients make sound financial decisions and plan for retirement, they themselves are also faced with these same challenges in regards to their own practices. Premature death or accident are an unpopular topics under any circumstances, but nevertheless, they are subjects that need to be addressed so that loved ones and business interests are taken care of after death.

The creation of a succession plan for your business should not be considered an optional exercise. It’s a task that owners and executives must complete for the sake of their employees and shareholders. Think of it in terms of establishing a legacy for yourself.

Expansion through acquisition looks great on paper, but there are a lot of moving parts to address before it can become a reality. The most obvious question is, “Where is the money going to come from?” There are a series of steps required before this can be answered.

All businesses, regardless of type and size, have an organizational structure that determines how the company is managed on a daily basis. While they may have all the right advisors in place for the current state of the business, it is important for organizations to make sure they have a plan in place to keep the business thriving long-term, regardless of who is at the helm. Succession planning, as both a concept and a strategy, establishes a framework for identifying and developing next-gen talent to replace the founder when she/he exits the business.

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There are multiple reasons to believe that the number of mergers and acquisitions in the wealth management space will be high in the next five to ten years. To start with, over 50% of active financial advisors are over age fifty. Many of them will be looking for an exit strategy. Combine that with the fact that very few advisors have a succession plan and the increased deal volume year-over-year recently and it is reasonable to expect more consolidation short and long-term.

There are a wide variety of methods and approaches that can be used when determining the value of a financial services business. There are three business valuation methods that are commonly considered. In many instances, one of these valuation methods may suffice, but depending upon the circumstances, it can be beneficial to use a combination of these valuation methods to achieve a detailed and accurate representation of the firm’s fair market value.

Over the next 10 years, 4.5 million businesses with over $10 trillion in value will transition into new hands via mergers and acquisitions. A major source of this shift is the retirement of baby boomers - 10,000 of whom turn 65 every single day. It is therefore more important than ever that business owners keep a pulse on their valuation, and to value their businesses annually. This can help business owners identify weaknesses in their business, make better financial decisions, and provide them with an opportunity to implement informed strategies for improvement moving forward (among other benefits). Not only will valuations help business owners run their business better in the short term, understanding the value of their firm will help them be prepared to sell the business and understand what it is worth when the time comes.

Mergers and acquisitions are team activities. Surgeons don’t go into the operating room without nurses and anesthesiologists. Business owners shouldn’t enter into an agreement to sell or merge their business without M&A support.

Selling your business is not only a difficult decision to make, but it can often be a costly one if not done correctly and objectively. And while the particular path you choose for your exit will inevitably vary, it is important to understand who will help you in that process, in what capacity, and what responsibilities you have as an owner. If you are thinking of selling your business or planning to sell in the future, here are the costs you should consider.

What Exactly Is M&A?

The term "mergers and acquisitions" (M&A) broadly refers to the process of one company combining with another; however, the method and legality of how these terms are processed are slightly different.

As most business owners will attest to, starting and running a business involves a combination of conviction/passion, perseverance, stress and personal sacrifice. Owners invest a significant amount of themselves and capital into running these businesses, and as a result, most have a substantial portion of their net worth tied up in their business. The vast majority of owners/founders we've worked with here at Succession Resource Group have communicated that their business is not just a valuable asset, but their most valuable asset. So, why do so few owners have an answer for their key stakeholders about when they will retire from their business and who will succeed them? Many Financial Advisors make preventable mistakes in succession planning because of common myths giving them a sense that they can deal with this topic tomorrow. Here are the most commonly believed succession planning myths that hold business owners back from effectively tackling this important topic:

The market for advisor practices was set to be a record year in 2020 based on closing 2019 out on a high note, with valuations and deal terms as good as they have ever been. Fast forward three months and COVID-19 has eroded all these gains and left many advisors reeling and re-evaluating. As an advisor thinking of phasing out over the next few months or years, you are probably thinking, “Great, now what?”

Ensure that you receive your Succession Resource Group (SRG) emails and subscriptions by adding the SRG domain to your list of safe senders and/or contacts.

Developing a succession plan is a great tool to ensure your business continues to grow while you eventually work less and begin to realize the value of your business. But, a key piece of developing a plan for you and your business is having the right successor. For some, this person may be an existing employee or junior partner, but for the majority, the solution is to find a peer to sell the business to. The sale often involves a long-term gradual work-out period providing you with an exit strategy that lets you leave your business on your terms. So, where do you find a succession partner? And how can you do it with paying a hefty commission to a broker? Read on.

What would happen to your business, your clients and the value of the company, if something where to happen to you suddenly? Do you have a plan and systems in place to ensure your business will carry on until you return? Or, a plan to ensure the business continues under someone else’s leadership if you cannot return?

It may sound contrarian, but if you are interested in buying a business, do yourself a favor and never ask the question, “Can I buy your practice?” Experienced advisors that have bought a business before know this to be true, and the reason is simple. The question ignores the fundamental realities of practice acquisition in the financial services industry. In the financial services business, the person who says “yes” to the question, “do you want to sell?” is not necessarily the type of person from whom you want to buy a practice.

If you asked us five years ago about financing the acquisition of an advisory practice in the financial services industry, there would not have been much to talk about. Until recently, almost all deals were done using a combination of buyer’s funds and seller financing. Bank financing was not a viable option for most deals because lenders generally struggled with the collateral on the loan – an advisor’s most valuable asset in their business is the client relationship and cash flow those relationships produce. Before the market drop in September 2008, some advisor buyers were able to leverage home-equity lines of credit or large business lines of credit, but most had to use personal funds to finance their deal, which priced many otherwise qualified successors out of the market. Until recently, the typical deal for advisors with less than $5,000,000 in annual revenue involved 20-40% cash down from a buyer, with the balance seller-financed over 4 to 5 years at 5-7% interest. That is changing, and the results seem to be good for everyone involved in the deals.

Great article from Matthew Halloran on succession planning. He makes 10 good suggestions for buyers/sellers to be thinking about, here is a quick summary:

Every business and client base is unique. But, there are some common core elements for advisors to consider if they want to begin developing a succession plan or internal ownership track for the next generation. We have seen and developed a wide variety of plans for our clients and know it's easy to get bogged down in the details or let these types of plans become overly complex and “die on the vine.” Our recommendation? Start planning sooner rather than later, and keep it simple.

At some point in your career as a small business owner, you will find yourself either needing or wanting a partner (I use the term "partner" in the loosest sense of the term). Whether it is for the purposes of adding/retaining talent, expanding your business and talent pool, sharing expenses, or building a succession/exit plan, finding someone to partner with in serving your clients is essential for businesses to survive for multiple generations.

What should you do when one of your key staff comes into your office and tells you they are resigning to go start their own competing business? The simple thing most of would do is to take their resignation and call them a Judas. But, consider an alternative. When your key executive has that entrepreneurial spark and an idea, try harnessing it to your advantage!

AGE MATTERS

Age matters – we all hope it doesn’t, but the reality is that the age of your clients and their corresponding assets can have a drastic effect on the value of your business. An aging business is a dying business in the eyes of a buyer who is considering the long-term buying potential of the your book of business. One of the most important things to increase the value of your business, and one of the most difficult items to change, is the age of your clients and the amount of multi-generational planning that takes place in your company.

Not All Revenue is the Same

There are many ways to grow your practice – the most obvious being adding more revenue, more assets and/or more clients. However, not all revenue is created equal in the eyes of a buyer, and not all revenue has value. The key is to ensure your revenue is predictable, and this can take place in a variety of ways for both recurring revenue sources (fees, 12b-1s, renewals, and trails) and transactional sources. Regardless of source, buyers will pay a premium for predictable cash inflow.

As a business professional, I have no doubt you have met a colleague or two that has told you all about the horrors of having business partners. I too have heard these stories, and they are vivid reminders about the weight these types of decisions should command. With that as my disclaimer, I want to share with you some of the benefits of having junior partners and go beyond the obvious potential benefits like collaboration, sharing work, infusion of capital, or synergies.

Selling a business, in any industry, is a major endeavor with far-reaching implications for a wide variety of stakeholders. The first question for most owners is timing - "When should I sell my business?" This is both a personal and financial decision. If your intent is to sell to an internal successor you have or will groom, you will need significantly more time and resources than a sale to a peer/competitor. Internal transitions should start planning at least five years prior to the owner's planned retirement, where a sale to a peer might only require 3 to 5 years of transition time for optimal results (from start to finish). Regardless of who you sell to, and when you decide to do it, here are a few important items, that if you keep in mind throughout the process, will produce a better result for everyone:

Change is hard. No one likes it. So it is no surprise that so many advisers avoid the subject of succession planning. Both a Cerulli Associates study and polling by the Financial Services Institute found that almost 60% of advisers have not yet identified a successor. Yet every year more advisers get closer to their inevitable transition. An estimated $2.3 trillion in assets is controlled by advisers over the age of 60.

After witnessing hundreds of agency leadership transitions, whether it's planned, forced, tragic, or amicable, change in leadership is always difficult. You may think you have all your ducks in a row, then one will fly off on you. Here’s some help finding what could work for you:

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Join us as we delve into the 2017 Advisor M&A Trends and discuss another exciting year for the financial services industry with increased RIA and advisor consolidation, changes in compliance and the Department of Labor Fiduciary Rule, and the tax reform —  all of which had a direct/indirect impact on the value of RIA and advisory practices. This infographic shares the 2017 highlights in addition to what we shared in SRG’s live webcast.

As an advisor, you provide tremendous value to your clients every day. But, what is often overlooked in the advisor-client dynamic, is the value they provide to you. That is, beyond the fees or commissions they pay you for your service, products or advice, your clients are providing you “value.” By that, I mean that your book of business (your clients) has a very real and tangible value that you can monetize some day when you are ready to exit the industry.

As an advisor, at the end of a career, your business is your masterpiece – it’s your Picasso. It’s one of a kind, and in today’s market, you will not have trouble finding someone who wants to take it off your hands and pay you for it.

But, there is a huge difference in getting paid, and getting what your business is worth from the best possible successor for your clients. The majority of advisors will not obtain the best deal, and many may not even be selling to the best successor. There are four key obstacles standing between you and the best deal with the best buyer:

On Thursday, March 15th, the U.S. Court of Appeals for the 5^th Circuit struck down the DOL Fiduciary Rule. It is not known at this time whether this ruling will be appealed, or if it will apply to the entire country or just the states residing inside the 5^th Circuit Court’s jurisdiction (Louisiana, Mississippi, and Texas). Nevertheless, the decision will have an impact on the value of advisor practices in 2018 and beyond, due to the expected shift in the supply-demand curves for advisor practices that are for sale.

There are many complicated facets to running a service-based business, but the most vital component are the relationships you build every day. These relationships are the basis of value, and, for most, your business is your largest and most valuable asset. The most frequently discussed factors that impact the value of your business are profitability, how consistent your revenue is and the growth rate of the practice.

As a small business owner and advisor, your attorney or accountant will provide many reasons why you should consider forming a corporation or limited liability company. These reasons include limiting personal liability, the ability to share equity, and possibly reduce taxes. For independent Registered Investment Advisory firms and insurance agencies, the setup and use of an entity is relatively routine – you file and form your business entity, and clients and/or carriers contract with that entity and pay that entity directly.

What is a contingency plan?

A contingency plan is an agreement between two or more advisors designed to protect your business in case of your death, disability (temporary or permanent), loss of license, and possibly even retirement (although most plans do not deal with succession planning). There are a variety of plan types to solve for these issues:

This article was originally published by the National Ethics Association and E&O for Less on February 26th, 2016 and written by Harry J. Lew, NEA Chief Content Officer.

Most financial advisors are aware that a succession plan is important to their business and clients. Based on the last study done by InvestmentNews in 2012, 94% of respondents acknowledged the need for a plan, yet only 7% of those respondents actually had a plan.

We recently spoke with an advisor who generated $10.5 million in annual revenue and was contemplating the sale of his business. Like many, he expected a premium sale price/valuation given the size of his operation, his radio show that generated a consistent stream of new business, and being located in a very desirable market. Surely his business was worth the $30 Million he was expecting, right? The unfortunate part of the story is that, even though he had built a large “enterprise” and was the sole owner, he compensated all of his employees on an eat-what-you-kill (EWYK) model paying them a percentage of gross revenue for the book they serviced, leaving only a fraction of the total gross revenue to the owner (approximately $500K annually). Not exactly what you would expect from a $10.5 million business and would make a $30 million asking price seem ludicrous given the free cash flow.

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Growth is King

One of the most important drivers of value in any business is growth. Historical growth, while no guarantor, is a useful proxy/tool for projecting a business or asset’s ability to produce revenue in the future. As a buyer, you will pay more for a practice that is growing each year than one that is getting smaller. One of the biggest mistakes advisors/reps/agents make is waiting too long to sell their businesses, often having contemplated selling for several years before they finally made the decision. By the time many decide to actually sell the business, they have been coasting for a few years, causing their growth to stall or even decline – making it a suboptimal time to sell. For financial service practices, growth of the business can happen in three specific ways. Anyone contemplating selling their business, or a buyer looking at practices to acquire, should pay attention to the following growth metrics.

Depending on what source you look at, the average age of an advisor in the financial services industry is anywhere from 51-57 years old. While that would typically leave plenty of time until the average age of retirement, the average age of an advisor selling their business is much younger, most often occurring near age 59. This is due in large part to the long-term seller involvement that is ideal in the sale of a professional services business, ranging from as low as 12 months to as long as 5 years. While you may not sell your business, you will leave this industry – planned or unplanned. The better prepared you are for your eventual transition, the happier your clients will be with the process, and the more you are likely to get out of it (financially and emotionally).

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There are many ways to grow your practice – the most obvious being adding more revenue, more assets and/or more clients. The most valuable businesses in the industry however focus on building value in their enterprise every year, in addition to growing the revenue/asset base. There is a long list of recommendations that we would make as your succession/valuation consultant and the easiest way to understand these recommendations is to look at your business from a buyer’s perspective. When a buyer evaluates a business for purchase, there are many items reviewed in due diligence that drive or detract from the value, including the revenue sources, growth rate, age of the clients, location of clients, client service process and many others. Here is our first tip in this series of how to Build a More Valuable Practice:

As a small business owner, there are many things that fill your typical day, most focused on either maintaining the business you’ve built or on ways to grow the business. Having worked with small business owners over the last decade, I know most of you reading this post don’t spend any measurable amount of time thinking about your succession/exit plan. With this in mind, the focus of this post is to answer a question I hear frequently from owners and their successors – “When should we start developing the succession plan?”