Planning your exit from a larger firm

“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.

Advisor says: i just watched your recent video series on IE:TV regarding succession planning. Although much of what you say makes sense in most typical financial advisory practices, my situation is quite different.

First, we are a substantial investment-counselling firm with more than $2 billion in assets under management and several branch offices across the country. Each branch is staffed by three to five advisors and four to six support team members. Our head office employs five dedicated staff, including me as full-time CEO.

Second, most of our advisors and some senior staff own equity in the business and no one person has control. About 10 years ago, the firm went through a disastrous succession from the founder to his son; I won’t go into details, but the business was almost destroyed. A group of senior advisors, including me, arranged a management buyout and I was asked by the others to take on the role of CEO. Since then, we have built a solid firm of good people offering great “family office” services.

We have a formal board of directors, including several outside directors. It was at a recent board meeting that the topic of management succession came up. I was asked about my eventual retirement plans and had to admit that I hadn’t really given it much thought. There is a strong desire for the next CEO transition to work out better than the previous one, so the board charged me with coming up with a succession plan.

I’d welcome any comments regarding succession in a firm such as ours.

Coach says: you are right on both observations. There are some universal considerations in succession planning, regardless of the size of a practice, but there also are some significant differences to consider for a larger firm. Let’s look first at some of the common elements:

– When should the process begin? In all cases, the answer is: as soon as possible. An extended time frame allows for more thorough planning and better successor evaluation and transition. In your situation, the board should insist that there be a succession (or contingency) plan for the CEO in place at all times.

– Choosing the right successor. Choosing a successor is one of the most critical decisions in any situation. However, I’d suggest the decision is more complicated in your case, given the size and complexity of your business. Although experience as an advisor is likely to be helpful for your successor, the board will be evaluating candidates more for their management and operational capabilities.

– Documenting the plan. Putting a succession plan in writing makes sense all around. A written plan informs other people in the organization about what to expect and the document can be used to monitor progress.

– Transition plan. A critical component in any succession is having a detailed plan to make the transition from one leader to the next. Although things can work the same way in a smaller practice, larger firms often make known well in advance who they have in mind as a successor by promoting that person to increasingly responsible positions that eventually will lead him or her to the top job.

While issues of practice valuation and negotiating with buyers are not a concern in your case, I am sure you’ll want your firm to be operationally fit and fiscally sound before you hand it off to the person who will carry on your work.

Further to this point: as I said in one of my videos, it’s always a good idea to run your business as if it will last forever, while always being prepared to sell it at any time to the most qualified buyer at the highest price. Being prepared will always be of benefit.

There are some considerations that are unique to succession in a larger business. Selection of candidates is one of them.

I assume that like most organizations, the preference in your firm is to promote from within. However, the board of directors, in executing their responsibility to the shareholders fully, may feel compelled to look outside your organization and consider external candidates as well. This may lead to issues among current advisors or staff members who feel they are “next in line” or deserving of the position as a result of their long tenure.

Although you apparently made the transition from advisor to executive with success, great advisors do not necessarily transform into great managers. The required skill sets are different in many ways.

Alternatively, you could have a situation in which the best candidate is one of your top advisors, but he or she is not ready or amenable to giving up clients to take on the CEO role full-time.

All of this points to the need to have a list of willing and qualified candidates from which to choose, coupled with a valid selection process. In situations in which the best candidate is not yet fully equipped to do the job, you also will require a plan to strengthen any weak management skills.

I’d encourage you to begin the succession dialogue internally sooner rather than later. This discussion will help to identify interested candidates and expose those who feel only they should be considered. Once you have either short-listed or settled on your preferred contenders, outline the selection process and any personal-development opportunities for those in the running.

You also should have a contingency plan to fall back on if things don’t work out as planned. Because this succession process will, hopefully, be a multi-year exercise, a lot can change along the way. For example, what if your top choice eliminates him- or herself partway through the process? What if you decide that person is no longer the preferred candidate? What if the candidate dies or become disabled?

While these are all situations to be addressed in the contingency plan for any practice, they take on greater significance in a bigger firm, in which larger numbers of people are counting on the firm’s continued prosperity for their livelihood.

Finally, there is the legacy that all leaders leave behind when they make the transition out of their leadership role. This certainly applies to you, as someone who gave up his career as an advisor in order to work for a group of shareholders to salvage a bad situation.

For more on succession planning, see pages B6 and B14.

George Hartman is managing partner with Elite Advisors Canada Inc. in Toronto. Send questions and comments regarding this column to ghartman@eliteadvisors.ca. His practice-management videos can be viewed on www.investmentexecutive.com.