The Practice Doctor is IN

Al Depman, CLU, ChFC, CMFC, BH

Finding a Successor

Chip, from Pennsylvania, recently wrote:

"Hey, Al. Succession planning often culminates with valuing the practice. However, I’m finding that the front end of succession planning is the challenge. Because a practice is an emotional as well as monetary connection to clients, the challenge has historically been around selecting, and working with the appropriate successor. How do you pick the right person that will have a similar value proposition, will meet the expectations of the clients, the producer, and will honor the entrepreneurial aspirations of the successor? It’s the practical ‘how to’ of taking on a mentee/partner etc., and the psychological implications of handing over your ‘baby’ to the successor. Even for a reasonable price that seems to be the biggest challenge. Thoughts?”

Thanks Chip. This is indeed an under-explored area. Finding that “right person” might have some trial and error aspects, but there are some best practices to guide you.

I've identified ten non-financial characteristics to look for in the ideal successor. To illustrate each characteristic, we’ll assume the senior advisor is five years from transitioning his practice and is looking for someone to purchase it. 

1. The potential successor needs to have professional life experience. The 10,000 hours rule applies: has she spent at least that much time in pursuing her mastery of financial services or a related business? This is reinforced in Malcolm Gladwell's current bestseller "Outliers." Those 10,000 hours allow the successor to competently perform the routine tasks of financial advising on an almost subconscious level. This allows her to focus greater mental energy on the practice as a whole, embracing all eight of the business systems that make up a successful––and transferable––practice (see number 2 for a list of those systems). A candidate with fewer than the 10,000 hours will probably be distracted by deficits in one area––time management or client acquisition, for example.

Jill was tapped as a possible successor for Marilyn. Jill was a fourth year advisor and doing well. Management teamed up Marilyn and Jill to see if there was a synergy. Jill’s background included a degree in marketing, a year of retail work, and a year of working as a bank teller. Her work ethic in the firm had been admirable––she put in 60-hour weeks for her first three years and 55-hour weeks on average during the past year. Consequently, over the past four years she had amassed well over 10,000 hours in the business. Combined with her dollop of experience in the banking world and college hours dedicated to marketing, it adds up to someone with a depth well worth exploring.

2. Will the successor learn the business systems put in place by the senior advisor, and does he believe in those systems? There are eight business systems: (1) Client Acquisition, (2) Client Management, (3) Sales, (4) Case Development, (5) Time Management, (6) Communication, (7) Education, and (8) Financial Management. The practice has been successfully running on these systems for years. Will the candidate want to revamp them significantly? 

Mike was prepared to sell his practice to Chris. The stars seemed aligned, and they had a price established. When I met with both parties, we reviewed their approach in all eight of the business systems. All were complementary until we got to Case Development. Mike had always used a proprietary asset allocation and investment modeling system.  Chris felt Mike’s system was weak and preferred his own method, one he had developed over the years and one that involved pulling out of the market twice a year and reentering at specific times. Mike knew his top-tier clients would never buy into that system. Chris was adamant, and the deal floundered as a result.

3.  Value statements and/or mission statements should be compatible in theory and execution. A reasonable amount of joint work between the senior advisor and the successor is a must in order to ensure the successor’s consistency in word and deed. Joint work is both appointments face-to-face with clients and back-office collaboration on case preparation.

4. There should be a minimum of a two year ramp-up where the successor has a defined number of reviews or meetings with the senior advisor's A-list. These meetings should cover financial and life philosophy, what the planned "next steps" are with the client, how to handle any legacy issues of the client's and his next generation, and a simple "gut check" of compatibility after the meeting. Both the successor and the top client should report separately to the senior advisor after the meeting.

5. Are the advisor's B and C-level clients fertile enough to help support the successor? The top 20 percent of the clients will produce 80 percent of the revenue and, as in point four, there should be compatibility between the successor and those folks.  Members of the other 80 percent of the clientele should have also been flagged for potential new business, additional assets to attract, and/or name-generating ability. Does the successor have the knowledge, systems, and staffing to glean the best of these opportunities?

6. Will there be a transition staff, or will the successor need to supply her own? A transition staff will provide a consistent voice and personality until the successor has become entrenched.

7. Will the senior advisor remain available for consultations? If not, the successor should be prepared to answer any questions from the clients concerning reasons for placing particular products or pursuing specific strategies.

8. If the successor has been an advisor with another organization, assess their practice to see strengths and weaknesses (visit www.practicetools.net for a look at this assessment). The results provide the basis for an excellent dialogue about compatibility, styles, vision, systems, and flexibility.

9. There should be a client survey done before the transition to set a standard of satisfaction that will be a benchmark for the successor. Assess overall value provided by the practice in the areas of: Service experience, contact preferences, depth of client information, opportunities for additional business, and “refer-ability.”  In scaling responses, it’s important to either go with a scale of either 4 or 6. This is to avoid the default “middle” response that an odd number would provide, which would tell you little of value:  1 = excellent, 2 = good, 3 = acceptable, 4 = unacceptable

10. Is the person capable of navigating the politics of the firm, home office, and other organizations important to the practice’s success? The senior advisor has built many relationships over the years that should be maintained. On the flip side, if he has burned bridges, the successor should be aware of that so he can try to rebuild them.

Using these 10 questions, I've derailed a few potential alliances and verified others. Often, there is an irrational optimism that the successor will “just fit right in.” This needs to be tempered. On the other hand, there are curmudgeon advisors who are pessimistic about giving their clientele over to anyone and as a result, need lots of reassurance. Using this disciplined approach brings out the best in all parties. With all these pieces in place, the discussion about sale price and financing will go more smoothly since the scope and potential of the practice has been fully vetted.

Comments and opinions welcome!

Until next time…

The Doctor is OUT.

Al Depman, CLU, ChFC, CMFC, BH, a.k.a. “The Practice Doctor”, is MitchAnthony.com’s Business Practice Consultant. He is the creator of “The Practice Management Assessment” tool and materials and has authored numerous articles in professional publications on practice management, and author of the forthcoming book, How to Build Your Financial Advisory Business, to be published by McGraw Hill in 2009. Al combined his Liberal Arts studies with 10 years of management experience with McDonald’s Corporation to enter the financial services world 25 years ago. Since then, Al has evolved from an MDRT-level sales rep into a full-time consultant specializing in helping others engineer their business practices to the next level. Contact him at al@mitchanthony.com.

© 2008 Al Depman