Vanessa Oligino, the Director of RIA Practice Management at TD Ameritrade, joins Hannah today to talk about succession planning from trends to best practices. Through Vanessa’s experience working with multiple firms through the succession planning process, she has seen what is working well and common mistakes that are made.

Firms tend to prefer to have an internal succession plan instead of an external succession plan, yet this brings a unique set of difficulties. Through TD’s surveys and research, more than half of successful internal succession plans have taken multiple attempts. Vanessa discusses the difficulties and what potential successors can do to set themselves up for success as they have the conversations and position themselves as future successors.

While firm ownership may seem like the “best” option, Vanessa challenges new planners to really consider what is best for them personally and critically evaluate whether or a firm is one you should buy into. Knowing what’s most important to you as well as what your non-negotiables would be related to firm ownership are critical to identify before considering potential succession opportunities.

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What You’ll Learn:

  • What the trends are in succession planning today
  • Challenges today’s planners are having in succession plans
  • How to have the conversation about a succession plan with the owners of a firm
  • Where firms are finding potential successors
  • Opportunities for new planners with an aging profession
  • Common missteps of successors as they buy a firm
  • Factors to consider when evaluating if you want to buy into a firm




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Episode Transcript

Hannah: Well thanks for joining us today, Vanessa.

Vanessa: Thanks for having me, Hannah.

Hannah: You have so much experience in succession planning and really this practice management with TD. I’m curious, as we look at succession planning, what are the trends that you’re seeing right now?

Vanessa: There’s a couple of trends that we’ve seen that unfortunately aren’t really shifting all that much over the course of time. Historically, succession planning has been very challenging for advisory firms. Most firms would prefer to develop an internal successor, whether that’s an individual or over the course of time, create a pool of minority owners, majority owners, there’s lots of different ways you can structure internal succession.

Vanessa: It is typically the preferred way for advisors, but it can be challenging for them. Over the course of time, we typically see when we survey firms, when we ask, “How many of you had an adequate succession plan or a viable succession plan?” It’s typically in the 30-40% range. Unfortunately, it hasn’t changed all that much over the course of time. It still is something that’s difficult for advisors to spend the time on, find the right people and actually get to that point where they’re signing contracts together.

Hannah: I love this idea of firms prefer an internal succession plan. What’s keeping them from doing that?

Vanessa: It takes time, right? So, if you’re a small business, and you are looking for an individual successor, let’s say to start, you have to find someone who has similar values to you, you have to find someone that you can build trust with over the course of time, and someone that has the leadership skills, the entrepreneurial business management skills, that are really necessary to be able to be a viable successor for you.

Vanessa: It’s like looking for your perfect mate in a business sense. It can take a good amount of time to find that one and many firms actually go through this a number of times. When we ask firms, “How many times did you attempt to put a succession plan in place?” Only 46% said that they were successful on their first try. 54% said they had to try at least twice.

Vanessa: But it’s definitely something that takes time, people need to work on building a relationship, from a business perspective, make sure that that person continues to develop and enhance their skills so they can be that successor further on down the line.

Hannah: In your surveying of firms, was there a correlation with how long somebody was at a firm before they became a succession plan?

Vanessa: Not necessarily. It depends on how they come into the firm. In some cases, advisors have said that they’ve hired someone who is maybe a recent graduate from a financial planning program, they take a little bit of time, they get their CFP, and then they begin to potentially shadow them and over the course of time, it can take anywhere from like two to four years, they become an advisor who is comfortable in their ability to source new clients, build greater, stronger relationships with existing clients, and at one point in time an advisor might say, or a founder of a firm might say, “Okay, this person has been with us, they’ve grown really well with us, I could see this person turning into a successor.”

Vanessa: Another scenario, someone might say, “All right, I think that I would like to exit the business in five years, and I need to find someone who can come in and begin transitioning.” They may look for someone that the day they come into the firm, it is known that they are going to be the successor, and they move forward in that way. So, it can happen a number of different ways.

Hannah: Yeah, I talk to a lot of new planners, or younger planners, or people in their first 10 years, and they’re really looking for that opportunity of, “I’ve been in 5-8 years now and I want to buy a firm. Where are these firms at?” How are you seeing these successors finding businesses who are looking for succession plans?

Vanessa: A lot of times I find it happens by accident. You might meet someone at a local meeting, industry, organization, that you’re a member of. Over the course of time, you start to develop a rapport, you might meet someone at a TD Ameritrade conference. Wherever it is, but there’s networking opportunities out there that allow you to become more acquainted and familiar with other individuals who could be potential successors for you.

Vanessa: So, what happens is when there’s a younger person who wants to buy into a firm, or buy a firm on their own, they really need to start networking with people who have established firms, and starting those conversations to say, “I might be interested in being your successor. Are you looking for a successor? Do we share the same core values, philosophy, and how we might run a business? Can we start to have discussions in that direction?”

Vanessa: But it is difficult to find that mentor or that person that you can grow with over time, and see yourself buying into and taking on that business. From the younger players’ perspective, they need to find the right partner, but they also need to believe that the business an attractive investment option for them, right? They are going to be buying into this business and they need to look at it, as an investment.

Hannah: What can a new planner do now to help position themselves to buy a practice in the future?

Vanessa: I think if they join a firm at a more entry level position, for example, they need to spend time proving themselves, that they can begin to show the behaviors that an owner needs to exhibit on a regular basis. They need to be able to develop business on their own, they need to be able to manage people, they need to be able to think strategically, they need to be able to understand how to put an efficient, operating infrastructure in place.

Vanessa: There’s so many different aspects to running a business and if you haven’t gone to business school, which many advisors have not, it’s something that you learn on the job. You need to continue to show that you’re proactive, that you can begin to learn all of these things, and actually excel at them. The other thing that comes into play is having clear lines of communication. Make it known to the owners of the firm that this is an interest of yours, and that you could see yourself potentially buying into the firm in whatever time frame that you’re looking at.

Vanessa: Make it known, and start to have those conversations. If they are not open to it, they need to look elsewhere. If you begin to have conversations and you see that the time frame is longer than you would like, and you don’t know that you can implement that, then you may need to find a different firm. It’s the lines of communication, but also exhibiting the behaviors so that the owners feel comfortable that you could be a viable successor and really lead the firm into the future.

Hannah: Do you find that firm owners are already thinking about succession planning? Like, are they open to this conversation?

Vanessa: They are open to the conversation. It depends on where they are. From an age/life perspective, as well as a business maturity perspective. So, one of the reasons they say that they’re not really ready is sometimes because they think that retirement is so far out that it’s just not time for them to think about it, right?

Vanessa: In those cases, we talk to them about the fact that while you may not be retiring in 15-20 years, you still need to have a succession plan in place from a business continuity perspective. Often you talk to them about it from that perspective to get them thinking about it. Other obstacles, they’re just really busy and as we stated before, you need to find someone who builds relationships over the course of time, mentor them, guide them. That takes a lot of time and effort, and it’s not always top of mind for other individuals.

Vanessa: The other thing is it is difficult to find younger people who have that ownership mindset that could be viable successors. Advisors are often saying to me, “Okay, I get it, I’m totally bought into, I need to bring the next generation of talent, but where do I find them?” There mainly are not that many people graduating out of these financial planning programs who are interested in joining the industry as a financial planner, a mutual advisor of a different flavor. It’s one of those careers that’s not as well known, so the talent pipeline is not all that large.

Hannah: That’s an interesting question because you look at the statistics of this, of we are in a very aging profession, and I’ve been hearing it ever since I started that there’s going to be this massive shift. Do you see that happening or are they still all just staying in the business and just aging?

Vanessa: I think there is definitely more of an awareness that they need to be focusing on succession planning. Many advisors are in their mid 50s, it’s probably the average, about, it changes depending on the research that you’re looking at. But they still have time, right? So, someone in their mid 50s is not necessarily ready to retire. They also don’t see themselves as getting older just yet.

Vanessa: So, there’s a little bit of that. “I’m not that old, I’m not going to retire soon. I can think about this in 5 years or 10 years.” What they don’t realize is the longer that they wait to start the succession planning exercise, the less options will be open to them. I talked about the fact that it takes 54% of firms said it took more than two tries to put a viable succession plan in place.

Vanessa: If you only leave yourself one or two years before you retire, you may not find the successor that you’re looking for, and you may have to take another path. You might need to merge with a different firm, you might need to sell your firm to another buyer, and then exit in that way which is not the preference of many advisors, right? The longer they give themselves, the more options they have to find the right succession plan for their firm, so that when we do exit, they feel really comfortable about how they’ve left their clients.

Vanessa: That is one of the biggest concerns that advisors have in whatever flavor of succession they decide to go down, that their clients won’t be adequately cared for after they leave, or their staff. If they have a larger firm, the staff who’ve been loyal and worked really hard for them, they want to make sure that those people will have a job and continue with the firm and be cared for in a way that they have.

Vanessa: The longer they give themselves, the better off they’re going to be, and they’ll be able to really realize the equity that they’ve built over time, and have a little comfortable level of how they’re leaving their legacy.

Hannah: You made a point earlier about the different types of succession plans, like there is a business continuity succession plan, and then there is a true, “I’m leaving in X number of years,” and them transitioning gradually out of the firm or just outright leaving the firm. How are you seeing those develop? Do people have that hit by a bus succession plan, if you would? Or how are those two types of succession plans addressed?

Vanessa: They can be different or the same, right? If you have someone who you are already mentoring and guiding to be your internal succession plan, if something were to happen where the founder has a medical issue for example, and needs to leave for a prolonged period of time, that person is already there and is known to be the future successor. They can step in and take over. If you don’t have someone who’s already there as a viable successor, other advisors have other plans, where there may be an advisor in their community that they have a continuity plan with, so that person can step in and help to run their firm while they have to step out for a little while.

Vanessa: What I do find is for those advisors who are caught unaware, and this happens multiple times a year, I hear this story, where the founder of the firm who is the full decision maker, is the primary revenue generator, all of a sudden gets a medical diagnosis and has literally days, if not weeks, to put a plan in place because they have got to go take care of their health or the health of a loved one.

Vanessa: If there’s no one in place, they might get lucky, right? They may have staff who can step in and keep things going. That’s a best case scenario. The worst case scenario is that the firm has no one, because it’s a sole proprietor and all of a sudden the clients are left with no one to help. That’s a worst case scenario. So, when that happens to a firm, even if they do have someone who can step in place, the founder all of a sudden is like, “Oh, my goodness. I knew this was a possibility but I didn’t think it would happen to me.”

Vanessa: As soon as they get healthy, they put a succession plan in place, almost every single time, because they’ve been through the scenarios, they realized the risk that they’ve put their families at, who depend on the income, their team members, and their clients. And all of a sudden it becomes their number one priority. Unfortunately, you hope that they can do it ahead of that, but many times that’s what I see.

Hannah: From a successor perspective, what makes a firm attractive to buy?

Vanessa: It’s a number of things that younger advisors are looking for. We actually did a case study not too long ago of I’ll call them the successor, and the owner. They had an interesting relationship. They knew each other for years, but they couldn’t come to terms on a number of what each of them had as deal breakers. But from the younger advisor’s perspective, he was looking for there to be a very clear transition timeline, where it wasn’t, “Well, when I think you’re ready” or, “We’ll talk in two years” or whatever the case is.

Vanessa: He wanted there to be a very clear transition timeline and milestones that had to be met by both of them along the way in order to move onto the next part of the plan. That’s one thing. The other thing that people talk about is does the firm have a strong infrastructure to grow from? So, have they been investing in technology? Do they have streamlined operations? Are they still doing things in a very manual way that is very people dependent? Is there a vision for the firm? Is the first growing? Nobody wants to buy a firm that is growing at like two or three percent a year.

Vanessa: Those are the types of things that they’re looking for and they want to know that they are investing in a growing, viable firm that can continue on in a competitive way in the future. So, those are the things that they’re looking for. On the seller side, if you will, they often have a lot more emotion baked into this, because they are thinking, “Well, this is my baby and I’ve grown it in the last 20-30 years, and I’m really proud that I’ve built an amazing firm.”

Vanessa: And that all may be true, but if you take the emotion out of it and you’re looking at it on paper, is it attractive? Do you have mostly aging clients, or do you have a really nice mix of client demographics that can sustain the firm over the course of time? A lot of different factors, but they’re both looking at it from a different perspective, and they need to come together in the middle and try to strip some of that emotion out on the seller side, and on the buyer side they need to understand that emotional attachment that the founder or the seller has.

Hannah: I’m fascinated by this idea of firm growth and how that plays into succession plans. You mentioned if a firm’s not growing, what is that a sign of for you, especially in terms of like a succession plan, or maybe a better way of asking this is what are the questions that somebody who’s looking at buying a firm should ask if they’re not seeing firm growth?

Vanessa: If they’re not seeing firm growth, they need to start asking questions around what’s the vision for the firm? What’s the strategy? How are you trying to … Are you trying to drive proactive growth or are you growing mainly through client referrals? Those are the types of questions. Are they being proactive about it and maybe just haven’t been successful in the strategy that they’ve tried? Or, are they just really being passive and running the business because they make a comfortable income and they’re not really looking to drive growth?

Vanessa: If that’s the case, you need to think about, “Well, if we could form a partnership, would you be willing to begin to proactively accelerate the growth trajectory of this firm and the effort and resources and time that will take?” If the founder/seller is not really open to that and just want to hand off what they have in the state that it’s in, as a younger advisor you need to question if that’s the right investment for you. You get into the business to be successful and run a successful, growing firm, you don’t want to buy an average firm or a firm that is having trouble from a growth perspective.

Hannah: And you see the pricing difference, if money’s not growing the firm, it just logically is going to be less expensive?

Vanessa: The valuation of the firm, there’s a number of things that go into the valuation of a firm. It’s things like are all of the clients aging? For example, if you have a client base that’s 65 and older, that’s not necessarily attractive from a valuation perspective, right? Because those people will die off, what are you doing to make sure that generational wealth transfer, that you’re capturing those assets as they transition? What are you doing to bring in younger high net worth investors to counteract the fact that you have an aging client base on this side?

Vanessa: That’s one thing, and like I said, the investment in technology and operations. The other thing is that there’s not too much dependency on any particular individual. So, if the founder is the primary revenue generator, and the founder leaves, that could be an area of concern. Like, who is now going to be generating the revenue to run the firm? If they have a Chief Information Officer who’s doing all of the portfolio models and investment selection and that person doesn’t come along with it, well now you have a gap in your investment management capabilities.

Vanessa: There’s a lot of different things that go into it and growth over time, has there been consistent growth over time, or is it inconsistent, and why is that? There’s a number of things that they need to be looking into, and asking a lot of questions.

Hannah: From your perspective, and just in your experience, or even in the research that you guys have done, what are the things that you’ve seen successors misstep on, or that they need to be watching out for?

Vanessa: I think not coming up a list of things that they want to change or make sure they come to agreement on. There are a lot of people who feel like we can have dinner together and we have a great rapport, I trust you, but you might think about certain things in a very different way. For example, if a founder has named the firm after themselves, for example, and the new person coming in has visions of completely rebranding the firm, and they don’t talk about that ahead of time, that can become a big issue.

Vanessa: I’ve seen that become a big issue because the founder is very tied to the name of the firm and feels like the clients are tied to the name of the firm and that’s how it’s been built over time, and that becomes a deal breaker for them. They don’t want to change the name of the firm, and then that’s a problem later on.

Vanessa: Or, they haven’t defined that transition timeline, right? When will that balance of power shift happen? If that’s left too open or too vague, that can create issues as well. So, there’s a number of things that over time, people may be in the process of implementing a succession plan and then it falls apart because they didn’t ask enough questions upfront and they didn’t talk about all of the different things that they might change or evolve together.

Hannah: One of the things I’m hearing of is people buying into their firms, so there are multiple firm owners. Are you seeing that become much more of a trend, people buying 2-5% of a firm?

Vanessa: Definitely. I think as firms get larger, you see that more. They have more employees and they really are looking to create a tiered ownership structure. There may be majority shareholders, minority shareholders, and each one of them have different voting rights and influence over the firm’s strategy and future, and you see that with the larger firms.

Vanessa: From a smaller firm perspective, you may see a founder sell the firm to two or three individuals, and put more of a partnership in place, whereas they were running the firm completely on their own. That’s because they want to protect the future of the firm, right? So, putting it in one person’s hands, that person may be super successful, they might be adequately successful, or they might fail at some point in time. By putting two or three people in place, you are giving the firm a better chance over time, as long as those people work well together.

Vanessa: So, I do see finding partners, they are more likely to put one or two people, or start with one successor, and then two or three years later, bring in somebody else who is in that role of minority shareholder, so growing it over time. If they have the time.

Hannah: For people who are bringing on those multiple owners, at the point where you’re bringing on a second owner, is the main firm owner making that decision or is it a group decision on that?

Vanessa: It’s a group decision as long as the first successor who was brought on has voting rights as they should, as an owner, and depending on how much ownership they have. They may not have ultimate decision making if the founder still retains 51% or more of the firm, but they should have some influence over it as an existing owner.

Hannah: So, for these larger firms that are looking at their employees and having them be shareholders, or part owners of a firm, what are you seeing? Because I mean, because it’s a different mindset because they’re not going to get a controlling interest in it. What would be your advice to that person who’s considering the offer that’s on the table?

Vanessa: I think it’s a smart strategy for firms that are looking to grow and become larger institutionalized firms, right? So, when somebody has a share of a firm, no matter how small, there’s that pride of ownership, right? The way that you approach your work, the way that you think about things changes, because you have an investment in the success of this firm.

Vanessa: There are some firms that are starting to move to 100% employee owned. There’s a couple of those out there right now, and they really see the difference in the engagement with their employees and their willingness to work harder to contribute value to the firm. So, I think there’s a definite benefit to that approach.

Hannah: One piece I haven’t asked you about is what is a client experience through succession plans? How much of a focus is that through what you’re seeing in the planning that’s going into succession plans?

Vanessa: That’s actually a really big part of it, part of the implementation process, is communicating this to the existing clients. In many cases, advisors don’t realize that their clients are actually worried about the fact that they don’t have a succession plan. They become really happy when that’s communicated to them. They’re like, “That’s great, I was wondering what you were going to do. I was becoming concerned about that” and they’re happy to meet the new person and begin working with them together as a team through this transition.

Vanessa: But you definitely need to have time where the owner stays to make people feel comfortable. If an owner departs immediately, there’s a bigger chance of client attrition, because they don’t have any relationship with this new person, there’s no reason for them to stay. From their perspective, they’ve gotten a new advisor anyway, so they might as well shop around and see if there’s someone else they would prefer to work with.

Vanessa: But if you take the time to introduce the clients over the course of time, you have meetings together, they get to know the other person and become trusting in that individual, and feel comfortable working with them, you lose barely any clients in that transition, and that’s huge. Because if you lose clients, you lose assets, you lose the ability to generate revenue, which are all of the reasons that make it an attractive investment in the first place.

Hannah: One of the things that we see a lot in the financial services media, if you would, is mergers and acquisitions. So, can you talk about what does that look like and what would make somebody want to decide to pursue a merger and acquisition strategy versus an internal or other succession plan?

Vanessa: I will say mergers and acquisitions is not for everyone. It sounds really cool to say that you acquired a firm and many advisors are willing to try it at least once. But it’s the kind of thing where if you say that is how you’re going to grow your firm, you are going to grow through mergers and acquisitions, you really need to do your homework and become an expert in the type of advisor that it makes sense to bring into your firm. What are the numbers? What numbers make it work? What type of advisor is profitable to your firm? Makes sense to bring into your firm? And start to build expertise in dealmaking essentially, and how to structure that deal, and making sure that you can help with financing options.

Vanessa: There’s a lot that goes into it, it’s almost like a new line of business, if you will. If you’re going to really say that’s how you’re going to grow, you need to make sure that you build out that expertise. That first deal is really tough, because you’re going to make mistakes. It’s the first time out, there’s no doubt mistakes will be made and if you can learn from them, the second deal goes better, the third deal’s even better, and after that, you know what you’re doing, it’s pretty smooth sailing for there.

Vanessa: That first deal is really tough and that’s where you actually lose people who aren’t that invested in the idea of growing in that direction as they thought they were.

Hannah: From your perspective, that advisor who is going to be more prone to doing that mergers and acquisition, what are their characteristics that make them unique?

Vanessa: I think that they understand the economics of it. They have figured out the ideal advisor, like an ideal client, right? Like who’s an advisor looking to bring on, what’s that ideal client? They have figured out the ideal advisor that they would like to bring onto their firm, they know what economics makes sense, they know what they can offer, they have a value proposition for them, they have existing people that they’ve brought on who can serve as advocates.

Vanessa: They have built this out, they have a value proposition, they have the economics, they have the offering that they can bring to the table. Those are the types of things that you see with a little more seasoned M&A provider.

Hannah: Where do you expect to see succession plans in the next 5-10 years?

Vanessa: I think that we will see more firms have succession plans, only because the founding members will get older and out of necessity they will have to do it. I’m hopeful that those numbers that I shared earlier, 30-40% or so of firms who have viable succession plans will grow. I think from a mergers and acquisitions perspective, we will see more and more firms striking deals, and the reason for that is there are a lot of sole proprietors out there who over the course of time, just get tired of running the business and really love working with investors.

Vanessa: So, what they may choose to do is join another firm, merge with another firm, take that burden of running the business away so that they can do what they really enjoy doing. I think you’re going to see more and more consolidation. I think we’re already seeing that. These larger firms, who have a number of deals under their belts at this point are really thinking about how they can become a platform provider for advisors who don’t want to run the business aspect, who want to plug into a business platform, but still run their own business and be an independent financial advisor.

Hannah: Is there anything else or any other thoughts that you have on succession plannings? Especially through the perspective of a new financial planner.

Vanessa: I think the perspective of a new financial planner, they really need to think about what they want in the future. It seems like you should want to be an owner, but that may not be the best thing for you. I often talk to younger financial planners and say, “You need to really think about the type of work that makes you happy and what your aspirations are.” Because becoming a lead financial planner, and then becoming the owner seems like the most logical way to go, but it might not be the thing that makes you happy at the end, right?

Vanessa: It’s very different working for a firm and owning a firm. The owners absolutely have to have a high tolerance for risk. As the markets go up and down, peaks and valleys, recessions, booms, they have to still run that business. There are times where they may not be able to take a salary because they need to pay their people. There are other times where everything is just beautiful. They need to understand that it feels very different running the firm.

Vanessa: The other thing, when you’re a younger financial planner, you’re spending a lot of time working with clients. When you’re an owner, there’s less time working with clients because you are running the business. You’re thinking about what’s the future? What strategies should we be putting into play? What are our business goals? How are we going to get there? It’s a different type of work also. The day-to-day looks different.

Vanessa: So, having them just really think through what do they want, what will make them happy, and can they really step into that role? Once they understand what it truly looks like.

Hannah: For the person who’s listening to this and is contemplating having these conversations, or hopefully already in the conversations with their firm owner, where do they go for resources for how to do this or how to get help for succession planning?

Vanessa: That’s tough. I would say that they should tap into their partners. They could, if they talk to TD Ameritrade, they could work with their sales relationship manager to understand who else out there has done this already, that I could connect with and learn from. That’s one thing. We obviously do a lot of research and we can provide them with industry trends and insights from people who have done this or people who are not doing it, and why aren’t they doing it, and people who have done it really successfully.

Vanessa: There’s information to be had. There’s also a number of consulting firms out there that actually help with the technical aspects of succession planning that they can tap into, to understand more about it. They’re definitely going to need to have a lawyer. The parties should not have the same legal representation. They need to have their own. They may need to check in with a compliance consultant, they may want to work with one of these industry consultants that project manages and helps people along the way.

Vanessa: So, there’s a number of different resources, but they’re hard to find, if you will. There’s a number that are known out there within the industry, but it’s not as easy as selling or buying a house where there are 15 different realty companies you can choose from. That doesn’t really exist.

Hannah: Yeah, no that makes a lot of sense. I think to your point often the best resource is finding other people who’ve gone through it.

Vanessa: Exactly.

Hannah: That goes back to the networking well.

Vanessa: Yeah. It really does. Networking is a huge component of this.