YOUR PRACTICE-Love or money for retiring advisers
* Hand-picked successor often can't afford buyout
* Internal transition can take decades
* May have to learn to love an outside buyer
By Jennifer Hoyt Cummings
NEW YORK, July 3 (Reuters) - When financial adviser Joseph Barry left A.G. Edwards in 2007 to set up an independent shop, he already had a successor in mind: his son, Patrick Barry.
At the time Joseph, now 62, gave Patrick a 30 percent stake in the company, New Bedford, Massachusetts-based Joseph Barry Co, and Patrick, 33, will likely start buying the rest of business in about eight years. The price tag will be the equivalent of 70 percent of the trailing 12 months' revenue at the firm, which manages $600 million in client assets.
Joseph knows he could have gotten much more money if he simply sold his book of clients to an outside acquirer. But seeing the culture of his firm preserved was worth the sacrifice.
"We know we have a duty to our clients to give them continuity," he said.
Like Joseph, the majority of advisers say they want to sell their business to an internal successor, both Charles Schwab Corp and Fidelity Investments have found when polling advisers.
But unlike Joseph, most don't have a plan. That is because if an advisory business is a success, the hand-picked successor probably will not have the cash - often millions of dollars - it takes to buy it. And unless the firm manages over $1 billion in client assets, banks and private equity firms aren't likely to make a loan to the successor.
That puts many retiring advisers in a quandary: Do they sell at a discount to the successor they want? Or do they take a big pay day and sell to an outsider, like another local firm?
Luckily, there's middle ground for advisers willing to make some concessions. But they have to start planning early if they want a say in what the firm will look like when their name is no longer on the door.
The most common option for advisers who want to sell their business to a successor without giving up a big pay out is to have the younger advisers buy the firm piecemeal over many years.
Bear in mind that your successors will not get a lot of assistance when coming up with the money. Banks are not interested in making these kinds of loans because they have to assume the firm's value may walk out the door with the retiring adviser. Some banks will put up a loan if the selling adviser will co-sign, but of course that puts risk on the shoulders of the older adviser.
Buyers can come up with the capital by getting a second mortgage on their home, taking a cut in their salary or giving up some of the cash flow they would be entitled to as an owner. The retiring adviser can help by picking several successors, instead of just one, to spread the costs out.
None of these options are easy, but the good news for small and mid-sized firms set on doing an internal transition is that help may be coming soon, with both Schwab and Fidelity exploring ways to help grease the wheels for these deals.
"We're all recognizing that the demand is there," said Tim Oden, senior managing director of business development at Schwab Advisor Services. "The options available are going to blossom for them in next 18 to 24 months."
Later this year, Schwab Bank plans to pilot a program to help provide financing for internal adviser succession plans. The intent of the program, which was announced last year and will target firms with $400 million or more in client assets that have three or more senior principals, isn't to take an equity stake in the business, but to facilitate a transition, Oden said.
A spokesman for Fidelity said the company is exploring ways it can help firms fund transitions, but added that it is too early to get into details.
Another option for retiring advisers is to give up their goal of staying independent and find a well-capitalized acquirer willing to hand the reins to the protégé.
There is a lot to like about this option: Your payout is likely to be higher, quicker and, in a lot of cases, you can potentially stay involved in the company if you want to.
Try seeing if your firm is a good fit for a so-called strategic acquirer such as New York-based Focus Financial or Newport Beach California-based United Capital, which both say they like finding firms where an internal successor can take over the business.
"Our ideal outcome is that there's a junior adviser who can step up in the lead role, so we become the financing component of the transaction," said Matt Brinker, senior vice president of acquisitions for United.
Another option is to find a local firm or bank to buy your business. Your custodian can probably connect you to willing buyers.
Before selling to an outside buyer, consider giving your successor a stake in your business, say 10 or 20 percent, suggested David Selig, chief executive officer of Mill Valley, California-based Advice Dynamics Partners, which acts as a consultant to mid-sized wealth management firms on mergers, acquisitions and succession planning.
This will give your successor a reason to stay on and will help give continuity to your clients.
In the end, the biggest challenge for retiring advisers may be admitting they need a transition plan at all, said Joseph Barry, the adviser passing his business to his son.
"One needs to have confidence in their successor to be able to overcome the difficulty of letting go of control," he added.
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