Succession planning: The answer within

Larry Olson didn't have to look hard to find someone to succeed him at the helm of the financial planning firm he founded 18 years ago. Indeed, he found his successor internally, within his firm and even his own family. He picked his son, Erick. “It's been a big help” having Erick on board, said the elder Mr. Olson, 76. “The level of service that we can deliver because we are a team is superior to many other practices.” Mr. Olson pointed out that a couple of years after his son began working for him at Olson Associates 12 years ago, the Roswell, Ga.-based firm oversaw about $30 million in assets. Today, that figure is closer to $80 million, he said. “It's been good for business,” Mr. Olson said. His older clients are reassured by his son's entrance into the business, he said. Indeed, they consider Erick, 36, as something of “an insurance policy” that there will be an experienced financial adviser in place to handle their family's assets for the next generation, Larry Olson said. Of course, most heads of advisory firms don't have their adult children in line to succeed them. But many do have other advisers on staff; for them, the best and most logical successor may be right under their nose. For many firms, internal succession offers the best chance of retaining existing clients amid a transition at the very top.

LESS DISRUPTION

In a recent survey of 820 firms by The Charles Schwab Corp., 80% of advisers with a succession plan listed internal succession as part of that plan. Internal succession tends to be far less disruptive than other succession routes, observers said. That is because it usually takes place gradually — often over a period of years rather than months. “Clients have time to get used to the shift in ownership, and they don't even notice it happening,” said David Grau Sr., president of FP Transitions, an investment bank that has helped many advisers sell their firms. “A multigenerational delivery team perpetuates the business.” Internal succession can also be a powerful tool for recruiting talented young advisers, Mr. Grau said. “You have to think beyond compensation,” he said. “You can attract the best of the next generation by creating an ownership track.”

A GAME PLAN

Generally speaking, a successful internal succession plan might look something like this: First, the firm's existing owner sells a portion of the firm — say, 10% or 20% — to an employee (or a group of employees) showing leadership potential. That sale is usually financed by the firm, or its owner, over a period of seven to 10 years. The employee pays for that ownership by using his or her share of the firm's cash flow. After that, subsequent transactions may take place until the employee owns the majority of the firm's shares. To create units, or ownership shares, a solo practitioner will need to convert to a limited liability company or corporation, Mr. Grau said. A tax adviser can help determine the most tax-efficient way to make the transfers. For many heads of advisory firms, internal succession offers a way to wean themselves gradually from the day-to-day responsibilities of running their practice and easing slowly into retirement. “I can play golf a couple of times a week, but more than that would be a little bit too much for me,” said Ray Olson Sr., an adviser with Ray Olson LLC in Midlothian, Va., and no relation to Larry or Erick Olson. “I need to be busy and involved.” Ray Olson Sr. faced some serious health problems four years ago and his son, Ray Olson Jr., bought his business from him. But the elder Mr. Olson is still on hand to help out where needed, and that is the way he wants it to continue as long as possible. “Ray and I have a mutual understanding,” he said. “Whichever one of us the client is most comfortable with” takes the meeting, Mr. Olson said. “Clients who are a lot older are usually more comfortable with me,” he said. Ray Olson Sr. doesn't think that he will ever completely retire, and Mr. Grau said that is the case for nine out of 10 advisers with whom he talks. “What they really want is to work less but perpetuate their income,” Mr. Grau said. “They don't want a $1 million check; they want $350,000 in annual salary for 20 years,” Mr. Grau said. Like with many family businesses, children are often groomed to head the business early on. Casey Weade, for example, began spending time at father Ron's advisory firm when he was just 6 years old. “It was like going to see friends,” he said. “I had cookies and milk, and clients got used to seeing me.” As he got older, Mr. Weade began to soak up his father's investment style and philosophy. “I even began to talk like him,” he said. “I have been groomed for this for a long time, just in case I wanted to be in that position.” A couple of years after graduating with a degree in finance, Mr. Weade pursued a representative position at a wirehouse, but after he reached the third round of interviews, his father made him a counteroffer, which he accepted. Now he is the vice president of Howard Bailey Financial Inc, and his father, who retains the title of president, works for him. “Our situation is definitely kind of unique, and it would not work if he was not my only child,” said the elder Mr. Weade. “He could fire me tomorrow, but that would be a tough explanation to our clients.” E-mail Lavonne Kuykendall at lkuykendall@investmentnews.com.