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The Shoemaker’s Children Have No Shoes AND No Inheritance

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As Advisors we make our living planning for our client’s future financial health. Our Job is to make sure our client’s families will be taken care of if something happens to the bread winner. But do we properly do that for our own families?  It is estimated that over 60% of advisors don’t have a succession plan or catastrophic plan for their own business. This is especially true in the fragmented RIA and Independent channels because it is harder to find another advisor that would be a good fit. Though there are some online matchmaking sites, the process takes much more than a “” connection.  The difficulty in finding a proper partner stems from the fact that many advisors have had relationships built over many years — most times with family and close friends. It is always hard to value a business, especially when you mix in the subjective nature of valuing relationships. This is where things get complicated.  The wire houses have cookie cutter succession plans with one size fits all valuation, which ultimately is just an extended payout of revenue.  Therefore, they typically offer the lowest value for your business and may not even incorporate any payment to your family if you were to pass away in the process.  If you have not chosen a successor, the wire houses just distribute your book through a computer algorithm to random advisors in your branch as they would when you leave their firm for the competition.  This means your family gets nothing.

The SEC is proposing a rule that requires a written Business Continuity and Succession Plan for all RIAs.  It is very comprehensive and if you have the fortitude to read all 96 pages, have at it:

RIAs will need to have chosen a successor and have a complete transition process in writing.  This includes what each team member’s role will be in the process and, post transition, exactly how client’s relationships will be handled and updated annually.  This means you really need to find the right partner and negotiate the deal, sometimes years before the succession happens. Undertaking this when you are not even thinking of retirement explains part of the reason for the 60% number.  Unfortunately, the downside of not planning means that all the hard work you put into growing your business could possibly go to benefit others. Your family could be left with no legacy for all the support and hard work they put into helping you be successful!  As an example:  A firm recently had an opportunity to help an RIA where the principal suffered a heart attack and decided it was time to find a successor. His Jr. partner didn’t have the ability to buy out his book and the principal didn’t feel he was experienced enough to handle the ownership transition. When the principal was released from the hospital, he brought his son (a lawyer) into the process. Unfortunately, a short while later he had another heart attack and passed away. The new firm had not gotten far along enough in the process to create a final agreement, and in that time the Jr. partner created a separate RIA. When the principal passed away, the partner moved the clients over to his RIA. This left the son and family nothing after decades of hard work!  Also, as a recent example…on January 2, 2019, AdvisorHub posted an article on the unfortunate death of Merrill Lynch Advisor, Rich Hanson. Richard’s wife, while dealing with his death, has had to fight Merrill to fairly compensate her and her family. These are real world consequences of not having a plan!

Wealth advisors need a firm that not only partners with them, but with their family and/or estate as well. Isn’t that what a true partnership means? They need a company that can be a partner with them today and as business grows will allow their heirs to reap all the upside and maximum value. A situation where everyone benefits from the growth of the entire firm. A firm that is truly focused on its advisors will allow them to earn a very generous equity stake based on the business that they bring in. Each share earned should have the same share class as the management team. In this way everyone’s interests are aligned the way that a true partnership should be.

Having a plan in place should something tragic happen to you just makes sense.  The idea is that “you made a commitment to us, and we are making a commitment to you and your family”. This is something that Laidlaw Asset Management has always believed in.

Ken Mathieson
Founding Partner, Laidlaw Asset Management

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