Thoughts on Succession Planning

Practitioner Concerns on Succession Planning.  In taking a group of students to a Financial Planning Association chapter luncheon today, I encountered several financial planners concerned about succession planning.  Two common concerns were: (1) the time (and money) spent to train new financial planners to a firm - often 2-3 years before a high level of productivity; and (2) the risk of a possible departure of a financial planner after being trained - and taking clients with him or her at the time.

As to the first concern, it is my experience that there are few experienced financial planners out there.  Those who seek to leave one firm to join another are often low in production - either lacking in technical skills through lack of dedication to ongoing learning, or lacking in relationship building, or both.  Of course, some financial planners will leave one firm and seek out another for other good and valid reasons - but again, finding good and experienced talent is rare these days.  Also, some of the "training" may have to be "undone."  The need to combat preconceived notions of workflows and client service philosophies can sometimes be daunting, especially when a person moves from a non-fiduciary culture to a fiduciary platform.

Hence, in my view, many firms should seek to hire new talent emerging from undergraduate programs.  (Admittedly I have a bias here, as a professor, but hear me out.)

The hiring process should begin with an internship.  Preferably one in which enough pay is granted to cover the intern's living expenses during the period of the internship.  But, even barring that, an internship is the perfect way to begin the hiring process.  Why?


Primarily, the leveraging of an advisor’s time is possibly the most important short-term benefit of hiring an intern. With more time – your most valuable commodity – you are able to focus on things many have neglected for a long time -- things such as your own personal life, your health, or tackling the things you need to do to evolve your  practice into a more efficient, viable,  and sustainable business (including process improvement and documentation, marketing, and succession planning).  But the benefits don't stop there ...


Understand The Potential Benefits.  The uses of an intern (aside from providing a well-rounded experience to the intern) include:

• Utilize interns to get to projects that have lingered for far too long
• Develop and/or update “total client profiles” for all of your clients utilizing mind-mapping or CRM software
• Verify beneficiaries on IRA and other accounts
• Review and ensure clients’ estate planning documents are obtained and properly filed and indexed
• Use technology-savvy interns to assist in implementing new CRM, PMS, financial   planning, or other software
• Have the “connected” generation spur on  your marketing efforts, especially through      the implementation of social media

Aside from projects like those mentioned above, consider these benefits:

• As discussed above - leverage your time - your most important commodity
• Facilitate “getting your feet wet” before committing to hiring permanent staff
• Try out a future potential employee … you can discern a lot more from 3-4 months than you will see in a one-hour interview, or even a series of interviews
• Show off you firm as a great place to work … interns bring back their experiences to their colleges, and to peers through FPA NextGen, NAPFA Genesis and other programs
• Give back to this emerging profession … enable an intern to discover the benefits of a fee-only practice, and encourage appropriate stewardship from the next generation

Plan the Experience.  Key to a good internship is setting reasonable expectations, for both the firm and the intern.  Here's a few tips about a possible process to follow.

• Submit recruiting information and the job description to colleges and universities
• Interview, undertake appropriate background checks, and make job offers — typically 2-8 months before the internship will start
• Assist interns with housing, if needed
• Have all staff members contribute to the formulation of a project list for the intern
• Some work that is all about the firm (e.g., updating databases, re-organizing files, etc.)
• Some work that is all about the intern (e.g., mentoring, education, etc.)
• Ideally, a lot of work that is both a genuine help to the firm and genuine learning (e.g., supporting updates to financial plans, gathering information from clients, taking notes during client conferences, preparing total client profiles, assisting with marketing and promotional efforts)
• Assign a mentor for each intern — to develop agenda for and to coordinate training, ensure  appropriate prioritization of projects to be  assigned, and to provide periodic feedback
• Have an “expectations meeting” with the intern, and with senior advisors and the assigned mentor present, when the internship commences
• Encourage staff to meet with interns over lunch and in appropriate social settings
• Conduct an exit interview

The Permanent Hire - The Roadmap.  If the intern performs well, and you are ready to bring them into the firm, you should have a clear roadmap on how the intern is trained in all aspects of the firm and moves from new hire to licensed junior advisor to senior advisor to principal of the firm.  Having a S.M.A.R.T. plan in place - with specific assignments for which the new hire (and the new hire's mentor) are responsible to achieve - is essential.  Semi-annual goal-setting and evaluation conferences are recommended, as part of this overall process.

Incentive Compensation.  Depending upon the new advisor's function, establish appropriate incentives (within regulatory requirements).  I'm a big fan of incentive-based compensation, whether it be at the firm level, the team level, and/or the individual level.

The Difficult Issues.  The second concern expressed by practitioners, as noted in the first paragraph of this post, deals with the potential loss of clients should an advisor depart the firm.  As set forth below, protection of intellectual property through non-compete, non-solicitation, and trade secrets clauses is an imperfect solution.  But I suggest a better way.

Nonsolicitation and Noncompete Agreements.  Thorny issues arise when preparing covenants to protect your firm.  First a background on the issues, and then I offer a suggestion.

Non-compete agreements generally prohibit a person who departs the firm from working within a reasonable geographic area.  This might be a number of miles radius from the firm's existing location, or within a specific town, city, or county, etc.  These agreements must be reasonable both in terms of geographic scope (typically 15 miles radius or less from where work was previously performed, although exceptions apply) and in terms of time (typically 2-3 years).  The problem, of course, is that persons in today's connected world can easily work out of their homes, or even in a somewhat distant office, and still serve clients in your geographic area.  Another problem is that courts don't like to enforce non-compete agreements, for they are a restraint on competition.  In some states non-compete agreements are not enforceable at all against financial planners; in other states they are enforceable.  The key to having a good non-compete agreement (despite its limited utility) is to have local counsel research and carefully prepare the document.

More common in financial services are non-solicitation agreements.  These typically state that specific acts of solicitation of the firms' clients cannot be undertaken by a departing advisor for a reasonable period of time - again, typically 2-3 years.  However, these types of agreements don't bar an advisor from being contacted by the client.  Nor can they prohibit the advisor from engaging in general advertising - such as by placing an ad in a local newspaper announcing that he or she has opened a new office, or joined a new firm, etc.  And - the protocol many broker-dealer and investment advisory firms have joined further limit the utility of this technique.  Still, and again, a well-drafted non-solicitation agreement can offer some protection to the practice.

A third, but often overlooked, aspect of the protection process is the protection of "trade secrets."  These might include information about the clients (see Reg S-P for the list of the limited information a broker/adviser may take when departing a firm), processes used by the firm in serving clients, marketing strategies, etc.  Again, a well-drafted trade secrets clause offers some protection.  As do copyright rights and trade name rights (both essential to protect).

A Better Way to Deal with Departing Advisors?  If you have a clear career path laid out for an advisor, with appropriate incentives, and you implement this path properly, the chance of an advisor departing the firm is much lower.  But it is still a possibility.  The best advisors tend to also be entrepreneurial, and want to own their own firm (or, over time, co-own the firm they've joined).

Rather than trying to tie the hands of an advisor solely through non-complete, non-solicitation, and trade secrets clauses - all of which can often be wholly ineffective - is there a better way.  I think so.

First, always have 2-3 team members serve each client.  If one team member departs for any reason, this leads to continuity for the client (and non-loss of the client, in most instances).  Of course, an entire team might choose to depart the firm.  And one departing team member may have such a deep relationship with the client that the client chooses to sever the relationship with the team members who remain with the firm.

Another way begins with recognition that both the firm and the advisor have a stake in the client relationship.  If the advisor undertook significant efforts in securing the relationship with the client, the advisor's interest in that relationship can be great.  If the advisor was "handed" an existing relationship of the firm, at no cost to the advisor, the advisor's quantifiable interest in the client might be less.

Of course, the firm has an investment in each client.  Numerous persons in the firm - from support staff to compliance personnel to vendors (paid for by the firm) - render services to the client, especially during the first year of any engagement.

So, why not recognize that both the firm and the advisor should "co-own" the relationship with the client.  And, if the advisor should depart the firm (for any reason), why not have one party "buy out" the other party's relationship, over time.

The value of each relationship can be quantified, using valuation measures common in the financial services industry.  For fee-only investment advisory firms, often the value is 2x annual revenues of that client, or even higher.  For commission-based relationships with clients, the multiple is usually far less.

Whatever the value assigned, both the firm and the advisor can "co-own" that relationship.  For example, for a client acquired by the firm, but assigned to an advisor, perhaps the advisor only "owns" 10% of the value of that client after serving the client for a year, then 20% after serving the client for two years, etc. - perhaps up to a maximum value of 50%.  The remaining percentage is owned by the firm.

For a client acquired largely through the advisor's marketing and promotional efforts, perhaps up to 50% of the client relationship is "owned" by the advisor, with the remaining part owned by the firm.

Then, if the advisor leaves, wherever the client lands - i.e., with the advisor or with the firm - the agreement can be that the party retaining the client will pay the other party that party's value of the relationship.  Typically this payment occurs over time - perhaps in quarterly installments over a five-year period (with interest at a reasonable rate).  [Whether to tie the amount of the payment to the continued retention of the client (and revenue from the client) is a subject of debate.]

Again, having a well-drafted legal agreement containing such terms is essential.  Research by the attorney as to the efficacy of this arrangement - i.e., purchase of an interest of the other party, and the enforcement mechanisms associated with same - is essential for each jurisdiction in which this arrangement is attempted.  Agreements with clients may have to be modified (as well as Form ADV Part 2A disclosures) to reflect the sharing of client information upon the departure of an individual client - or specifying that the client has a period of time to choose who to retain.  The tax implications of the purchase of a client relationship should also be known, when such an agreement is drafted (i.e., what are the tax consequences to the purchaser, and to the seller, of a partial interest in a client).

Also important is the ongoing documentation of who owns the relationship - and in what percentage.  Disagreements over ownership of a client relationship, whether between the firm and the advisor, or between advisors themselves, could be submitted to a person designated to resolve such disputes, whether inside or outside the firm.

Advisor Solely Owns the Relationship?  There are many advisors in the financial services industry who believe that the advisor should always own the entirety of the relationship.  This is a 180 degree swing from the traditional wirehouse model, in which the wirehouse owned the entirety of the relationship.  Again, I don't believe either perspective is entirely correct; both firms and their advisors have interests in client relationships.

The Co-Ownership Model:  A Path for Succession Planning?  Rather, as stated above, I believe both the firm and the advisor have legitimate interests to protect, as to the client relationship.  The key, in my view, is to acknowledge these competing interests, and to structure a fair and reasonable arrangement to address these interests.

If properly done, significant litigation need not occur when an advisor departs a firm.  And, in this way, a firm that desires to expand by hiring new financial planners can protect its interest, while ensuring that the efforts and contributions of its new employees are also respected.

Any thoughts on this?  I'd love to hear your opinion .... - Ron