#FA Success Ep 274: Succession Planning Vs Continuity Planning In A Seller’s Market, With Maria King

Resources Featured In This Episode:

• Maria King
• Transcend Practice Management
• XY Planning Network
• FP Transition, Succession Resource Group
• Commonwealth
• Buckingham Wealth Partners

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Full Transcript:

Michael: Welcome, Maria King, to the "Financial Advisor Success" podcast.

Maria: Well, thank you, Michael, for having me. It's a pleasure to be here.

Michael: I'm really looking forward to the discussion today, and talking about what, I don't know, almost feel like is one of these elephants in the room in our advisor world conversations these days, which is succession planning. You look at the broad-based industry surveys out there around succession planning, and it's pretty much the same year after year. Something like 20% or 30% of advisors have any kind of written succession plan and the overwhelming majority do not. And we've had these statistics coming up from folks like Cerulli Associates for a decade now of something like 50,000 to 70,000 advisors are going to retire in the next 5 to 10 years as we have this giant massive wave of retiring advisors, which was supposed to create this succession crisis for us. And we've been going through it for, I think pretty much 10 years as I recall since we started talking about this, and we're still here.

It doesn't really feel like there's been a crisis, but there are more advisors exiting. There's more succession stuff planning. There's more firms figuring this out. We've certainly seen the boost in mergers and acquisitions, which to me is the other way you exit if you're not internal succession-ing. It's kind of happening but more slow motion, but it's happening. And so, just I'm looking forward today to talking more about just the real-world dynamics of, I know, succession planning, why is it not happening more? What does it look like when it is happening well? And how does succession planning move forward from here?

Maria: Okay.

Where Transcend Practice Management Stands Today [04:22]

Michael: So, I think, to dive in, I'd love to start by just having you talk to us a little bit about just your firm and what you do. I know you do some consulting with advisors around a wide range of practice management issues, including succession planning. So, tell us a little bit about your consulting firm to kick us off. And then, we can kind of just dive a little bit more into some of these issues that we're dealing with.

Maria: Yeah, of course. I'm happy to. Yeah. So Transcend Practice Management is the firm that I founded last July, and it is designed to provide a wide range of practice management, consulting, and coaching services to independent financial advisors. And while we do cover a range of business management issues, whether it's about strategic planning, or human capital issues, or growth, we do seem to have a particular focus on succession planning right now, primarily in response to the demand from the advisors with whom we're working. It's a topic that, to your point, advisors are very interested in, but have, I think have a difficult time executing on for a number of reasons. On the sort of catastrophic side, planning for death and disability, I think facing their own mortality is a big psychological hurdle for them to contend with in order to be able to plan for that appropriately.

And when I was at Commonwealth, we had about a third of the field force had an agreement in place for that eventuality. And it was a percentage that just never budged. We could never quite get folks to see the way through, to make a plan that they were comfortable with. And on the other side is the planned exit. And whether that's for a sell and get out and be out all at one time or whether it's a phased transition, or as you said, whether it's merging into another firm and then sort of reconstituting yourself until you leave. Advisors, I think, are intrigued by that, especially with valuations being where they are today. Some of the numbers that are getting tossed around out there are crazy. Somebody called them frothy to me. This whole thing that it's been kicked up and it just seems like it's a little bit amazing.

And so, advisors are intrigued by it, but for them, they don't want to feel like they're being sort of vacuumed up by a larger organization and that the unique flavor and culture that they built within their organization is just gone. They really do want to have some kind of legacy. And so, finding a way to exit in a way that they get value for what they built, but the legacy is preserved with the...and fitting into the right culture. It's a bit of a chess game to try to find the right solution for them. So, most of what I'm working on is that ladder, trying to help advisors figure out what is the balance of strategies for them to employ in order get to a succession plan that they feel good about.

Michael: So, I'm struck a little bit by just, I guess, the distinction you make. I think, as you framed it, there's sort of the planned exits and the unplanned exits, right? There's the, okay, I'm getting ready to sell and retire so I want to do whether that's an internal succession or external sale, whatever it is. And then, there's the unplanned exits, right, death, disability, external events that drive us. And I guess is I'm curious for your thoughts, cause I have always thought about these as being really quite substantively different. I feel like in the industry, often we cover all of that under this broad label of succession planning. But at least to me, I've always thought about the unplanned exit scenarios as something more akin to, I don't know, at one point I was using the label...just talking about it is continuity planning. This isn't a succession plan, at least as classically constructed.

You usually, when you're planning for unplanned exit, right. You're planning for death and disability, this is essentially about continuity, just continuity of service so clients are not disrupted, you don't have the situation of the advisors managing your portfolio. And actually, the advisor passed away a few weeks ago and no one's called you yet. There's literally no one manning the ship right.

Maria: And what the hell.

The Difference Between Continuity And Succession Plans [09:01]

Michael: And that happens. That actually happens particularly for some smaller and solo firms. So, it's one thing to think about it as what is your continuity plan and make sure that clients are taken care of. And perhaps if you're a little bit of a larger team and have a staff, like making sure that your team is taken care of, what's your continuity plan for you handling your team and your clients if something happens to you, to me, is substantively different than succession planning. That feels, I guess, not even just planned exit, but is kind of succession planning tends to be a retirement-oriented exit. Continuity planning is more of a death, disability, external-events-driven transition. Is that a... I guess I'm just wondering, is that a fair way to make a distinction? Do you think that's a helpful way to start talking about the landscape?

Maria: I think so because I, too, see them as very, very different. With a traditional succession plan, it's controlled, right? The advisor who will eventually be leaving is participating in that process and is helping to influence the success of that ultimate transition of clients and accounts and staff to that new organization. So, there is an enormous amount of control that they have and how they do it, when they do it, what the messaging is around it. With the continuity plan and I, too, have used that label as well, Once the plan is invoked, there is no control by the exiting advisor. So...

Michael: It is a triggered event usually.

Maria: It's triggered, right.

Michael: They literally have. Like buy-sell agreement triggered in the event of investors' death or disability.

Maria: Right. So, when you think about that scenario, it's almost always a call out of the blue to that partner on the continuity side of things to say, hey, you're on this agreement as being the continuity partner for this advisor, I'm sorry to inform you, they've passed away. Are you ready to step in? And so, out of the blue, that continuity partner now has to drop everything they're doing for their own business and step in and get oriented to this new business that may or may not be all that familiar to them.

It's a tough... And the staff, I mean, the impact on staff, it's a totally different animal. And so, the valuations are different on the continuity side. They usually are at a lower or multiple than on the planned side because of that eventuality. And so, you need a continuity partner then who has the ability to do that, who could pivot like that. So, you're usually looking at larger firms, for smaller advisors looking at larger firms that could have the capacity to have somebody step in and be able to be that responsive in that circumstance.

Michael: Yeah. It reminds me that I had an advisor friend a couple of years ago. We'll keep him appropriately anonymized, just call him Jim. And so, Jim was actually had a version of one of these basic continuity event agreements. I always called these the crosstown agreements like advisor friend in town, if something happens to me, then you buy my clients. If something happens to you, I'll buy your clients, and they just had this kind of reciprocal agreement. It was two solo advisors who were on their own with just an admin staff each. They didn't have another advisor in the firm to succession to. There was no alternative for them. So they said, you buy mine, I'll buy yours, if something happens to either of us.

And so, they were in that agreement for many years, and, I guess, kudos to them, really actually executed bonafide signed buy-sell agreements. The legal paperwork was done. The staff was in place.

Maria: That's great.

Michael: And then, the event got triggered. So, Jim got the phone call from the now widow that so and so had passed away and she found the paperwork of apparently you're supposed to be buying this. So, according to the paperwork, you're supposed to be buying this for... I mean, it was some moderately, but not hugely reduced valuation number. I want to say it was like one and a half times revenue when "the going rate was two times revenue."

And so, she was like, "Well, my husband's practice did about $400,000 a revenue last year." I think it was like $40 million practice or so. She's like, "So it looks like you owe us $600,000 and you now have another 72 clients that you should probably be calling immediately since my husband passed away a few weeks ago, and I just found this."

Maria: Oh gosh.

Michael: And because they didn't even do... So, there were all sorts of issues to this like, one, the formula was fixed. They thought they had put in a "conservative" protection at valuing at one and half times revenue. But it was that way. There was no, if the clients transitioned, if the clients retained. It didn't have contingencies. They just figured a conservative number would protect for some of that. But now all of a sudden, Jim was a couple of weeks behind by the time the widow had gotten to the paperwork, but the debt was already tolling.

Maria: Yes. Right, right.

Michael: You owe us $600,000, and you haven't even made the first phone call to get the first dollar of revenue to retain it yet.

Maria: Wow. Wow.

Michael: So, Jim had to just drop everything to try to go find retain the clients. Basically, the admin staff had just been responding to them trying to keep the wheels on the bus, cause the admin staff didn't actually know about the plan...

Maria: Oh my goodness.

Michael:... that was there cause they signed it years ago probably before that admin had to even join. So, the admin and the wife are just trying to figure out how to keep the wheels on the bus and just not have clients flee out the door. Eventually, Jim gets the call. So, he's got to go now immediately start meeting with 72 clients and better retain them cause he's got a $600,000 debt hanging over his head to be able to service it, which means he basically had to halt all meetings with his clients cause there wasn't any time.

So, almost blew up his own practice, had a horrific mad scramble with zero notice to go try to save the clients of the other advisor. And just all driving off of, it sounds like a neat thing to say, hey, I'll take care of yours. You take care of mine. We'll have this reciprocal agreement. But going to the very heart of what you'd said, they made a continuity plan, they signed it and dotted the Is and crossed the Ts, which was great. And granted that valuation formula probably should have been contingent on revenue and not just as an upfront price, but they had terms and everything, but Jim just literally had no capacity to handle this. And so, what he ended out with was, I think at the end, he retained about half of the other clients. He lost almost a quarter of his own.

Maria: Oh, wow. Oh, wow.

Michael: Because he just couldn't meet with them.

Maria: He couldn't handle it.

Michael: He couldn't... I mean, just he went from a really happy, comfortable practice with his own 60 or 70 clients to about 140 clients overnight.

Maria: Wow.

Michael: So, and had to put all the focus on the other ones because that was the ones that had the debt attached to it. Finished with a little over a hundred clients after he lost whatever, it was like 10 or 20 of his and about 30 of the other persons.

Maria: Oh wow.

Michael: And finished...did okay financially cause in the long run, advisory clients are still pretty profitable, so. Was able to do okay. But after about two years of misery, now finished running a much bigger practice than he actually wanted, now bringing in more money than he wanted after paying off a debt he didn't really want to have to deal with. And just all of this stuff happened because they were trying to do the good thing of, well, let's make sure we've got a continuity plan in place, but just no thought to the capacity of if something happens, do you actually want the other person's clients on top of your own? And the answer was no.

Maria: No, no... Yeah.

Michael: He got a really nice practice. And went through two years of chaos to get basically similar to where he was but working more hours than he wanted, to have more clients than he wanted.

Maria: Wow. What a story. And it's not unusual, unfortunately. And I think some of the ways that plans like this can be successful is to, number one, it's all about communication, right? Communicate that not only that you have a plan to your spouse or your partner, whomever you're sharing life with, make sure that they know that you have the plan.

Michael: Yes. That would've helped. At least Jim could have gotten a little bit more of a head start if his team and his wife actually knew about the details of the agreement. They just sort of, he done something. There was something in place. No one ever really thought about it cause Pete was healthy.

The Importance Of Communicating The Details In A Continuity Plan To Others [18:37]

Maria: Right. So, the communication thing is usually important cause I don't know whether he experienced this, but in my experience, if that successor, the continuity partner can't get in front of clients pretty quickly within the first couple of weeks, a healthy portion of the top clients have found somebody else to work with. They're not waiting around for a continuity partner to reach out. So...

Michael: No, they don't wait long. Again, like a lot...I think a lot of the other advisor clients just... I mean, the admin staff couldn't hide it. So, pretty much anybody who called and found out the advisor was dead and the admin staff did not have a good answer as to like, so what happens now? They were just immediately looking for other advisor.

Maria: Of course. Yeah. Of course.

Michael. And no offense, really enjoyed working with the firm, but there was only one advisor and he's dead.

Maria: He's gone.

Michael: So, I'm just going to be finding another firm now.

Maria: Right, Yeah. They're going to take care of their own self-interest. And so, communication is huge. Certainly, to your life partner, to your staff, but also to your clients to let them know I do have a plan in place and this is who it's with and this is who they are. And then, getting your continuity partner in front of your clients. And I find it odd that sometimes I've worked with advisors who have been reluctant to do that because they're afraid that the clients are going to choose to move to the continuity partner before anything happens, which I think would be unusual unless they were given reason to. Or that the continuity partner is somehow going to pilfer the clients, which then makes them number one, you didn't do your due diligence, and secondly, that they're not a good continuity partner if you think that. So, there's just some of this irrational thinking that goes into why advisors don't share information about their continuity partner with their clients, but they really, really should.

And then, the other thing I say is, if you have a continuity partner, be sure that you're staying in touch with them at least once a year to revisit your agreement and make sure it still works for both of you. And that you're thinking through, like what happens if this thing triggers? What goes down? And how can we try to make that as smooth as possible? You can do something to try to smooth it out ahead of time. But obviously, you never know if it's going to be triggered, so you can't do it perfectly, but communication is such a big piece of it.

It's not just about having a plan that you've signed and you've put in a file, and so, you're all set. You've got to keep it alive. You've got to keep talking about it, keep it front of mind so that in the event something does happen, you have the best chance of making it successful for everybody involved. But it's really hard for the solo folks out there to find an appropriate continuity partner and to be a good continuity partner because capacity is a huge issue, huge issue. And so, a lot of firms that I talk to, they're looking at larger multi advisor ensemble, enterprise organizations, and for good reason, because they think, well, if anyone's going to be able to step in and respond on a moment's notice, it'll be an organization like that.

Michael: Yeah. I mean, we did versions of that. Both my prior advisory firm and Buckingham where I am today, we...both organizations had agreements that we would sign with advisors saying, look, if something happens to you, we'll buy out your practice. Here's how the valuation will work. Here's how the terms will work. I mean, my prior firm was over 2 billion under management. Buckingham, we're over 50 billion under management. We have the team depth, that's very manageable for a large firm to say, if something happens, we have other offices in your city that we can help service the clients from, or just, we have the resources to say, Hey, then we're going to open an office in your city, and we can do that next week...

Maria: That's amazing.

Michael:... and get something out there cause the organization is large enough to be able to do that. So, I've seen that shift to some extent of saying, okay, if we're going to do sort of backstop capacity, those kinds of backstop continuity agreements with firms that have capacity.

Although, I will say, I've also seen a number of advisors over the year who basically communicate to the clients like, "Look, your assets are custody to Schwab. If something were to ever happen to me, the local Schwab office is a mile down the street from my office. You can walk into any Schwab branch and be serviced by Schwab. I'm happy to work with you. I plan to work with you for a long time to come. If something ever happened to me, your money is there, your money is safe. The organization is absolutely enormous. Everything, your assets have continuity and safety. You can simply start working with a local Schwab branch, but you came from a Schwab branch to me cause you wanted more personalized advice. I'm happy to work with you for a long time to come. But hey, there's this large platform that sits as a backstop."

And I feel like that's starting to come up in other area. I've seen advisors talk about RIA custodians that way. I've seen some, at least at large broker-dealers, talk about their broker-dealers that way, like, look, if something happened, there are seven other advisors from our broker-dealer in town as well. So, one of them can step in and support.

And we've certainly seen it on TAMP platforms as well. I mean, we do this at Buckingham and a lot of other firms and a lot of other TAMPs do as well to say, "Hey, if something happened to you, your assets are literal really already on our TAMP platform, we can facilitate an introduction to another advisor on the platform who will take care of your clients." Clients don't even have to move. They don't have to repaper, which easier for the client and usually better for your valuation cause the clients don't have to repaper, they tend to stay, and if they tend to stay, then you get a better valuation offer.

Maria: Right. Right. Yeah. No, that's a huge consideration. I think that that's awesome. The other side of it is I do think a lot about staff. I think the staff of advisors kind of the overlooked part of the equation when it comes to continuity. And so, again, being thoughtful and keeping your continuity agreement as a point of conversation on a regular basis to be able to help staff understand what would happen and what their options might be if anything should happen to the advisor. I remember an advisor passed away a few years ago, had had apparently the best round of golf of his life, like had shot whatever and was thrilled.

Michael: To some number that golf people think would is awesome...to people who don't play golf.

Maria: I don't golf. Right.

Michael: I don't golf either.

Maria: Okay. So, apparently, it was fantastic, and on his way home, he stopped at the office to do something and sadly, literally died at his desk. It's unfortunate. And didn't come home. The wife became concerned, started calling, thought to go to the office thinking maybe he had gone there. And so, she did, sadly, discover him when she was alone. And so, we got the call the next day and he did have a succession plan in place, but the staff member was so at odds. She went in the next day and she's like, what do I do? And who's paying me?

And those are questions you don't think about when you're a small solopreneur. And so, we had to talk her through that and talk the spouse through that and help them find somebody that they could work with to take over the book of business and try to get in there as quickly as possible. And it's that scramble that very much like the story of your friend, Jim, albeit a little bit more immediately. It's just such a scramble and such a hard thing, but my heart just went out to that staff member who had to go into that office where she had worked closely with him, with the advisor for so long. And she's sitting there day after day fielding calls from client. Just the emotional burden of that.

And so, I think giving some thought to the staff and just what their experience is. And I don't think enough thought really goes into that. Not from a...certainly not from a malicious standpoint, but you just don't think about it. We're thinking about the clients, we're thinking about getting value for the business, but really need to be thinking about staff members and the impact on them, too.

Michael: So, that's the domain of unplanned exits, and I was struck by your comment at the beginning that just, to me, rings so true, that any of these unplanned exit dynamics, right, death and disability, just it reminds me of working with clients to get them to do their estate planning documents. Just no one wants to do it. It's fricking morbid.

Maria: It is, yes.

Michael: No one wants to think about this and dig into it. And so, on the one hand, just, I guess, we can make our own collective plea to everyone that just...like this staff does matter, I mean, literally as much as the rest of your estate planning documents do. It's part of what we do as advisors. But as with any estate plan, just if you're going to set up an estate plan for what happens, make sure the plan is something that the other side can actually execute. Don't Jim your clients or don't Jim yourself. Poor Jim. No offense to anyone who’s name is Jim.

Maria: I would just add one other comment on this front on the continuity side of things. The one other thing that I always recommend advisors look at is in your agreement for death or disability, pay particular attention to how disability is defined. Because I've had a couple of agreements over the years where the language was fairly vague, and during the crisis of 2008, 2009, there were some advisors who really struggled with their own mental health during that time. And I saw a couple of spouses invoke the plan on behalf of the advisor claiming that disability clause.

Michael: Wow.

Maria: Yes.

Michael: Like, I'm watching my spouse suffer too much, I'm going to try to exit them for what I believe is their own mental health benefits. So, I'm pulling out the agreement and calling their successor and saying, "I believe this has been triggered due to mental health clause."

Maria: Yes, yes. And that I know one of the agreements had a six-month clause that the condition was believed to last for at least six months or more. And so, the plan could be invoked. And so, there apparently had a mental health professional sign off on that. And so, the plan was invoked and the business was sold and the buyer baked in a non-compete into it, and also, a statement that if the advisor were to come back into the business, they could not return within two years within a hundred-mile radius. And so, what do you think happened? The advisor recovered his health but then had no business to come back to.

Michael: And nor could make a new one. Just got severed from their own practice.

Maria: Yeah. So, he actually did move up a couple of hours north and start from scratch again. So, I really...

Michael: Wow.

Maria: Yeah. It was really surprising. Totally understandable. I understand...

Michael: Yeah. I mean, as the buyer, I understand why you'd do that. Just don't sell to me, get the check, and then open up shop again across the street. If someone's retiring, you usually don't worry about that. But if someone is disabilitying out or just otherwise leaving working age years, like that's a legitimate concern you got to worry about as an acquirer.

Maria: Yeah. So, pay particular attention to how disability is defined and how you want that whole section to read. Because, again, once it's triggered, it's triggered, and it could be triggered at a time where you wish it hadn't been.

How Maria Approaches Structuring Succession Plans [31:07]

Michael: So, let's shift a little bit, we've kind of talked about just the world of unplanned exits, the continuity planning dynamic, but then you get to the other end of the spectrum, which is the planned end, right. Either internal successions or external sales for which, again, we've noted. I mean, literally the majority of advisors have not said an articulated plan or any kind of written plan around how this happens. And to me, one of the fascinating things for a long time about the advisor business is just, this is a business you can do a long time. This is not a business where you retire because you became eligible for social security. That's not really a trigger for advisors the way it is for some other careers and professions. In between the income we earn, just the fact that it's not as a manual labor, physically-intensive job. So, the body can carry a little longer sometimes. It's not uncommon for advisors to keep going well into their 60. Sometimes, even to their 70s. I know a few in their 80s.

So, I've always been struck by all these statistics saying the average age of an advisor is 55. I'm like, okay, cool. So, a lot of us won't have to retire for 20 plus years. That means this...we might not have a succession planning crisis until the 2040s because you can do this a long time, but not everyone one wants to, or not everyone wants to at the pace that they are today. So, there are some changes that start to happen in that intervening time period.

So, it just having worked with this so long, you did this at Commonwealth for many years before launching your own practice, how do you see advisors approach this or how do you approach this with advisors to start this journey or at least start this thought process around succession planning?

Maria: Yeah. I think that the valuations that are in play today are really bringing a lot of advisors to the conversation in a way that they hadn't before. So, now they're intrigued because they...at a minimum, they're really interested in seeing, can they take some chips off the table, right? They don't know whether the valuations are going to stay this high or how long they'll be at this level. And so, is there an opportunity for them to maybe not fully exit, but at least start to take some chips off the table, whittle down the book a bit, stay focused on a more targeted segment of their client base, and then, to your point, continue on. Because as long as they have their mental health and mental acuity, there isn't anything that's really forcing them to leave, right.

So, and if they love it and most of them do still love it and they enjoy it, then why not stick around in it? So, a lot of what seems to be bringing folks to the table right now is around the valuations and wondering how they can capitalize on the valuations that are out there without fully exiting. So, I've been working with a few advisors to help them design a transition plan to the next gen that is in-house. It's an internal transition, which is lovely. And it's a great opportunity for these early 30s advisors who have ambition and they have what it takes, and they've shown that they're great advisors and they're great with clients and relationships, and they have some business-building capacity. It's a wonderful thing, but valuations are high.

And so, for them to acquire a practice, a $10-million practice, it's just out of their league. And so, helping to figure out how can we carve out a tranched sale or a phased arrangement so that these next-gen advisors can start to get some skin in the game, start to have some equity in the organization but not be buried by this debt over the next couple of years. So, I'm doing a lot of that kind of modeling with offices to figure out just what would it need to look like?

Michael: And so, what does it look like? I mean, how do you structure one of those deals? Cause I hear this discussion crop up with a lot of advisory firms as well, particularly, once they get to a certain size that they are multi advisor, so they're internal advisors to sell to, but that also usually means by then you are at least a few hundred million under management. You might even be a billion-plus dollars under management. And suddenly, you're talking about something that is millions or could possibly even be north of 10 million enterprise value. And just that's a big old chunk of firm for anyone to acquire much less a next-generation advisor in their 30s who's like, yeah, I'm working on my 6 figures of student loan debt and still try to pay that off and you want me to take down eight figures of acquisition debt on the firm? No, no.

Maria: Yeah, no. That's not going to work. Right. Right.

Michael: Not going to fly.

Maria: So, we do see it in couple of ways, in phases and with more than one buyer, right. So more than one G2 advisor in place. And so, for example, one office that I've been working with they...we started off just thinking, well, we'd love the G2 to buy in at 50% over the next 5 years and be a 50-50 partner with the founding advisor at that point in time. And then, they'll continue on for a number of years. The lead is not ready to retire anytime soon but understands the importance of moving in the direction of getting that advisor into an equity position and an ownership position.

So, we modeled it out just with some traditional assumptions right out of the gate, and it just wasn't going to work. If we used the valuation that they had received last summer, it just wasn't going to work. They'd end up with $12,000 in income for a year. I'm like, that's not going to work. So, we ended up playing around with it a lit little bit, and what we ended up with were five 10% tranches acquired in successive years and each tranche having a 7-year promissory note attached to it. And we baked in some conservative assumptions around growth of the asset base and the revenue stream, also some assumptions about growth, maybe not so conservative in expenses.

And through that exercise, we got to a point where it would be an 11-year buyback or buyout. But the seller is comfortable with that timeframe. And then, over that period of time, the G2 will get to that 50% level, and assuming the assumptions work out to be what we think they might be, would have a very healthy income stream at the end net of making all those debt payments that she could afford it. So, but it took a number of machinations to try to figure out what is the balance. Do we use an earn out? Do we try to go out and get funding from another lender? Do we use a promissory note? Is the seller willing to carry those notes for the buyer? So, there's a lot of considerations there. But we think we might be at a place where we have a reasonable solution.

For another advisor though, in a very similar spot, he has a G2 that just wouldn't work for. And so, we need to...we're working on getting that G2 to a smaller ownership level and figuring out who party number two is, right. So there needs to be at least one other buyer in the mix in order to make an exit plan work for the founding advisor. And we don't yet have that G2 identified. So, we need to figure that one out. And then, for third advisor they, too, they have a G2 in place that is a family member but acknowledge that can't take it overall on his own. So, we're looking at a combination of a partial sale of some of the book just to reduce the book overall, and then, identify what portion that family member would be able to reasonably take over and buy.

And then, we know we need to get a second buyer in-house and in place in order to take over the rest. Luckily, these advisors have long-term horizons, right? They're looking 8, 10 or more years out. So, they have a ramp that they can make all this happen. But for the advisors who are...you have a much tighter timeframe, their options are few. An internal successor is probably not going to work. And so, they need to be looking outside. And for a lot of them, they're looking in the RIA space and seeing if there's a solution for them there since there's so much private equity floating around on the RIA side, right?

Michael: For those who aren't familiar, can you just explain a little bit more of...you talked about sort of this sales and tranches plan, phased purchases, just how does that work, or why are you doing that as opposed to just saying, I'll sell you 50% and finance it over a whole bunch of years? What are the mechanics and purpose of the tranching?

Maria: So, the tranching is enabling them to... The seller feels that they're able to handle a gradual addition of debt over time by doing sort of 10% a year for 5 years versus doing 50% right out of the gate. And then, trying to make that work, that felt too burdensome when it was modeled out. But when we broke it down into 5%, 10% increments over 5 years with a longer tail for the buy out of the promissory notes. That felt like and modeled out to be a more manageable cash flow situation for them.

Michael: Because by... I guess with growth of the tranches, by the time you're buying the third or fourth tranche, if you've had growth, the first tranche is probably pretty healthy cash flow positive. And so, the free cash flow from the first with growth...

Maria: First two.

Michael:... helps to fund the third or fourth. The bad news, third or fourth is a little more expensive cause the firm grew in the meantime, but you can literally cash flow it more easily than bear a whole brunt of the whole purchase payment...

Maria: Upfront.

Michael:... financing the first year.

Maria: That's right.

Michael: Cause the first year becomes the squeeze. It's great in the year seven. It's not good in year one.

Maria: Yeah. Year 7, year 11 is beautiful, but year 7's not so good. Year five is pretty bad too. But yes, you're able to improve your cashflow over time. Again, assuming that our assumptions are going to model out, and given where markets are today and that these firms are fee-based, who knows what's going to end up really happening. But it seems like it can be a more bearable process if you do it as incremental tranches over time.

Michael: Well, and the other thing, to me, that's always struck me about these purchases is that so much of it at the end of the day just comes down to how long you can finance it or how long you're willing to finance it. I mean, look, I can buy out a multi-billion dollar firm right away like piece of cake. Just give me a 20-year note, and the payments will be so modest, amortized over 20 years that I can buy it now. Right. I mean, it's why the average American family can still manage to buy a house.

Maria: Buy a house, right.

Michael: Little harder right now with inflation, but generally speaking, it's why we can manage to buy houses that are many, many, many multiples of our income because when you finance it over long enough period of time, the math works. It always struck me that... Well, our rule of thumb for so long was kind of advisory firms with recurring revenue sold for two times revenue, and we would use this multiple of revenue number. But if you went and pulled the benchmarking studies, advisory firms historically we're usually running something in the neighborhood of 25% to 30% profit margins, at least on average, fluctuates a little year to year.

And if you're running 25% to 30% margins and you're selling for 2 times revenue, that really means you're selling for about 7 times your profits, 7 times free cash flow. And then, you go and look up the average time period over which advisory firms would be financed seven-year note. We've always tended to finance the is in a manner where the cash flow can cover the note. Usually, a little bit less at the beginning cause you pay the note with after-tax dollars, but you buy with... But the income comes through pre-tax so there's a little bit of slippage from the tax and you only get to deduct the interest and not the principle so forth.

But it would usually be at least relatively close in year one, then you get a little bit of growth and there's a little bit more free cashflow in year two. And then, usually by year three, it's getting pretty comfortable and then it keeps going from there. And that so much of this just comes down to financing periods. And so, again, as you highlight it, if you stretch it out over seven years, it becomes more manageable. If you tranche it out over time and stretch it out over 8, 9, 10, 11 years, it just starts to become even more manageable.

You still get into the domain of some people just aren't risk-takers and don't want to take on the debt load and the risk that it entails, but that's not a the next generation can't afford it. That's a, the next generation just isn't as risk-inclined, which may be why they took an employee job in your firm...

Maria: At first. Right.

Michael:... instead of going out and starting their own practice. I mean, that's fine. We all have our own preferences, but I do find sometimes advisors, if we went and built our own firms, we sometimes forget not everybody's necessarily as entrepreneurially risk-wired as we are.

Maria: And do they need to be? I think that's another question that is coming up. These founders started...a lot of them started the old school way, knocking on doors and calling them their 200 friends and family and...

Michael: Oh, get a natural market list. Yep.

Maria: Yeah. And so, they had to have that assertiveness and that drive to be able to do that kind of work. And some advisors, founders think that their successors need to show that same tenacity and perseverance. And but do they? It's a different world that we're in today. I do think they need to show tenacity and perseverance but in a different way. I just don't know that they need to kind of be able to build it the same way. Sometimes, there's this also this layer of expectation that, well, they weren't employee and they are risk-averse, and so, maybe they can't do what I did. Well, no, maybe not, but they also don't need to.

But they need to bring other skills to the table to be able to build the business over time so that it continues to grow and it continues to be a viable entity. And so, do they have those skills? Do they have the relationship-building skills and the ability to get out in the community and with centers of influence and strategic alliances and all the rest? Do they have those business-building skills? And because if they do, then I think that that is hugely valuable. They don't need to be knocking on some stranger's door in 2022, because they would get in trouble.

Michael: Yes, yes. Well, and to me, you just, you bring up an interesting point around just...does the founder need to do this in the first place? I mean, look, I lived a lot of kind of championing our next generation advisor cause for many, many years now, but I had a conversation with an advisor friend recently and who had actually just finished her retirement transition and she didn't have a succession plan by conscious decision. So, Kathy's vision of this was, look, there's all this buying activity that's happening, I'm just going to keep running my firm until I feel like retiring. When I feel like retiring, I'm going to call one of these buyers and I'm going to sell it to them. And that's what she did. And she got a really good number. And it's gone fine.

She was very picky about who she sold to. So she vetted the heck out of them. She didn't quite pick the one that offered the biggest check she offered. She took one that offered a very nice check and had a really good philosophical alignment to culture and investment style and planning philosophy, and the things are important to her. Right. She was, like, yeah... She had a couple of team members, just none of whom had that risk inclination to be wired to be successors. She wasn't a solo. She had a couple of associate advisors in the firm, but just no one that had any real interest in being a buyer. And she was fine with it.

She's like, "I'll just sell it when the time comes." The industry stat that keeps bouncing around, there's still something like 50 buyers for every seller. And if anything, that it may even be worse than that given how valuations keep getting bid up, because there's so many buyers relative to the number of sellers. And so, look, I mean, I'm all for succession plans when there are next-generation advisors who really want to buy in and take over, and then, let's give them the opportunity cause frankly it's good for them and it's good for the firm. Cause otherwise, they're going to walk if they're that entrepreneurially-oriented. But if they're not, maybe it's okay...

Maria: It's okay.

Michael:... cause there's a lot of buyers that now it gets back to the first discussion, which is, if you're going to wait until retirement to sell and then just sell at the market rate when the time comes, you do need to figure out the continuity part of what happens if you don't make it from...

Maria: Exactly.

Michael:... from here to retirement. But short of that, I just, I feel like the volume of buyers coming to the market today has kind of changed this dynamic that way more so than even five years ago, and certainly 10 and 15 years ago. It seems like I'm just going to keep doing my thing and building my business, and when the time comes, I'll find someone to sell it to. Works just fine.

Maria: Yeah. Oh, yeah. Absolutely. Absolutely. And I mean, there are tons of buyers out there. My hesitation with the 50 to 1 metric, and I listened to something a couple weeks ago, says it was 70 to 1. And who knows, probably, but there are probably really four or five good ones that are really well-aligned with your firm to be great buying options, but there's still four or five.

Michael: Yes. You're not going to have 50 offers, all of whom you like, that's not happening. But if there are 50 out there, the odds that you can get down to a half a dozen that you're pretty happy with are pretty good. If there are only six buyers, you might only get one that you like, which is harder. If there are 50 buyers, you get 6 which you like, which is better odds for you.

Prioritizing Qualitative Aspects Over Potential Business Purchase Price [51:02]

Maria: Right. And when I work with advisors who are thinking in that way, cause I do have one client who is kind of in that space. She knows she can't transition internally. She doesn't have anyone internally. And so, she is starting to look outside and will just, who might it be? And the thing that I keep orienting her to is there are three things that make for a successful transition. One is alignment in culture, second is alignment of client experience, and the third is alignment in investment philosophy and strategy. Those three things are the three things that you should be vetting for right out of the gate.

Michael: I like that. So say those again. So, I guess I just want to make sure we get those. So alignment and culture, alignment in client experience.

Maria: Client experience and investment philosopy and strategy.

Michael: Investments philosophy, right? If clients aren't going to be happy with how they manage the money when it moves that won't go well.

Maria: Right, right. And so, if you can get alignment on those three issues, which are huge ones, the numbers take care of them themselves. I think advisors anchor to these numbers. It's what they know. They work with numbers all the time. And so, they kind of go at it backwards a lot of the time. They heard that the valuations are 2.8 or 3.1 times trailing 12, recurring, whatever. So, they anchor to these numbers and then try to make the situation work for them because of that number. And I think it's backwards.

Look at some of the qualitative aspects of the business because those are things that are harder to manage and to move, especially if you have a short timeframe. Make sure that you have alignment on some of these key things that are really hard to move on, culture, client experience, and philosophy. But if you can get alignment on them, the numbers usually take care of themselves. You can usually figure it out.

Michael: Well, so that, to me, is the other indirect sort of interesting effect of so much buying activity in the environment to the point that you mean, there may be 50 buyers and look, at best, you may only really like and be interested in half a dozen of them. But that's a half... A half a dozen bidders is more than enough to keep the price honest. I mean, not that it was dishonest, but you only need two or three competing bids to make sure that everybody is bidding each other up to the point of what's really like a reasonable market clearing, right? You're not going to get underbid. You're not likely to get shortchanged in that environment.

If there was literally only one firm you liked, you've got a little bit more risk than if they offer you a lower bid, like you don't have a lot of choices cause there's no one else that you like. But as few as two or three, tell A that B is offering this and tell B that A is bring this or you just have them submit blind bids when they know what's going on in the marketplace and what they have to do to be competitive.

And I've heard that theme play out for a number of advisors that were looking at selling firms that said like, yeah, we got a couple of offers from different firms and everybody structures their stuff a little bit differently of what's upfront and what's earned out and what's consulting and what's Goodwill. Once we unpackage all that, they were really all pretty much similar to each other, which is just nice, cause that means, okay, you'll get a fair price. Now, what are the non-pricing factors that actually help you decide which one you want to do the deal with?

Maria: Right, right. Yeah.

Michael: So, when you look at it in that environment, does that change how you think about succession planning or who should be thinking about succession planning in this world where you can say like, look, if something happens to you, you can find a big firm that's willing to buy you out and backstop you. And if you make it to the end as it were, if you make it to the retirement finishing line, you can also just find a firm that will buy you out and pay you a good price. So, when that's on the table, who does succession planning?

Maria: That's a really good question. And in my experience and in thinking about clients that I'm working with right now, it’s advisors and firms that have a real deeply ingrained sort of personal story behind why they got into the business and why they founded their own firm. And why having a legacy that prevails beyond their life and their career is important to them.

And so, some of these are folks in smaller geographic locations that have a real deeply-rooted presence in the community, are known as the gal or the guy who everybody goes to. And so, for them, it's less of a business transaction and it's more of a personal... It's a legacy. It's an extension of who they are. Not even an extension, it is who they are for many of them. There's so much self-identity caught up in it that the idea of just putting it out to the market when they're ready to sell is anathema to them.

Michael: Yeah. Yeah. It just sounds a lot like, "I spent 10, 20, 30, 40 years building this name, this brand, this firm, this business in my community. No, I can't just sell and have someone slap their big national firm name on it and call it a day after 30 plus years. No."

Maria: Right. Right. So, it becomes very, very personal for them. And so, for them, beyond the culture experience and philosophy I talked about a moment ago, it really is a decision about the character of the person or the people that they transition to. That becomes...maybe takes on heavier weight than it might for some others for whom they set out to build a business, they built a business. It's a going concern now, and it's time to give it over to new leadership. There's a bit of emotional detachment in a way for them, but for some advisors, it's still very much... It was born of a practice. It was born of a lifestyle practice, something that they do well, that they could do for people around them that they love and that they know, and they could sustain a great lifestyle while doing good work for people just like them.

And so, for them, this idea of sort of selling out at the time just doesn't land quite so squarely for them. So, they are really struggling to... And if they are in these more remote or rural towns or communities, it's harder. It's harder to find that perfect fit. These are the folks that think I need to find somebody just like me. And they probably don't. They could probably, they could find somebody who shares their values but doesn't necessarily have to be a clone of them. But it's a little bit harder... It's a harder transition for them because they haven't come to the point of being emotionally detached from the business. They haven't yet unwound their own identity from the firm. They're still very much tied together. And there are a lot of those advisors still out there.

Michael: One, it strikes me and then there are... So, I feel like there's two profiles that end up working. One is it's much more around the identity of the firm, the legacy of the firm, seeing the continuity of the firm itself, and finding someone who will carry that on. And so, external sale is anathema to them. And then, it strikes me that I feel like there is a second profile that can crop up, which is simply, it turns out that your crop of next generation advisors includes a few folks that are a little more entrepreneurial and risk-taking.

I mean, maybe not so much that they wanted to go launch their firms from scratch originally, which is why they're working in your firm, but they are willing to take on some of the debt and do the buying and do the transaction and maybe even have some hunger and desire for it. And just they don't become your successor because they want to build a legacy, they become your successor because they want to be your acquirer. They're just not external. They're internal and showing

the will and appetite to do it. And then, you can figure out how to make it happen.

Maria: Right. Yep. Yep. Exactly.

Michael: But I'm struck that even from your framing, or at least the folks in the firms that you're talking to, it is bubbling up more from the identity of my firm means something to me and I want that to continue, and what's driving my succession plan. My internal, I want to successor this plan.

Maria: Yeah, yeah. And I remember this real interesting story from an advisor who kind of fit that profile. Retired a few years ago and transitioned to two successors within his firm, rural area. He was the guy everyone turned to with questions. And then I asked him... After he fully retired, I asked him to come back and speak to a group of advisors that were just starting the succession process for him to share his experience with them.

And one story that struck me was that he was most surprised by walking into the market after he had retired and the announcement letters had gone out and they had an event and the whole thing. Walked into the market and he said, "People that had been my clients that I'd known for so long, they held eye contact with me less. And they weren't inquiring about me anymore."

The clients had moved on. The clients had moved on to this new generation of ownership, and he had never... He hadn't anticipated that. And it really...it's a small moment that signal a shift in identity and signal a shift in your role, in your place in the community that he hadn't anticipated and wished he had known to anticipate it. But how do you know? There aren't... I don't find a lot of these stories out there that the folks can sort of lean on and say, "Okay, I think I need to be thinking about that, too, for myself." Cause what will you do? What will you do if you go into the supermarket and you're received in a different way? Not an unpleasant way, but it's a different way than to what you've become accustomed. It's a huge change.

Michael: Well, and to me it just...it mirrors the same thing we see, at least I've seen quite a bit over the years, with clients going through retirement. I mean, it's the same thing. It's that challenge and loss of identity that comes when you've had a particular career so long and particularly when you had sort of only one career, cause advisors, one that people tend to do for lifers. If you survive the first few years, you tend to do it forever.

Maria: You keep going.

Michael: Not even just the client who had a thing...who had a career for 10 or 20 years, a lot of us as advisors do this for 20, 30, 40 years. It become so core to our identity and who we are. And that's really hard to imagine just retiring and stopping and moving away from. So, I think some of us are wired that way, did my thing, ready to move on to next stage of life, fine to let go. They retire and exit pretty smoothly, but for a lot of us, I think we don't. It's really hard. I mean, I think again, it's part of why we don't want to do succession plans cause you kind of have to face that.

And in part, why we don't do succession plans, it's like, "Why would I do that to myself? I can just keep doing this with the subset of clients I like working with as long as I'm able to still get on a golf course with them," which I plan to do well in my 60s or 70s even. Why would I leave... Why would I exit myself from that any sooner than I have to. And the answer is you don't actually have to do that soon if your health is good, again, asterisk, as long as you have a continuity plan if life has different plans for you.

Maria: Right. And I will also say, asterisk, if you have next-gen advisors on your team, that deferment of an exit can frustrate them. And so, you don't...cause sort of going back to your story about the family that ended up with the succession plan crisis. If founders or lead advisors certainly can stay in for a long, long time. But one of the costs is the motivation of the people that are coming up behind you. It's not like I think of Prince Charles over in the UK. He's been in the number two for his entire life and he can't really get out of it, but your next-gen could get out of it. They could get tired of waiting.

And so I think having a plan to give them increasing responsibility through the years, even if you're still staying on, continue to increase their responsibilities, get them involved in the leadership team, get them involved in strategic planning and having a real voice in how the organization evolves so that they feel like and they do have a sense of personal ownership in the organization so that they don't begrudge you staying on for a number of years. Because there is a bit of a cost to that with your next-gen if you don't handle it carefully.

Michael: Yeah. I mean, we, particularly in the early years that we had launched XY Planning Network, one of the most common types of advisors that we saw that came to launch their own firm was someone who said I'm on the seventh year of a five-year succession plan. And the boss has said, "Now, I'm really ready to do it over the next five years." And they're like...

Maria: Heard that before.

Michael: No, I'm not staying until the 12th year for this to happen, particularly because when we're 7 years into a 5-year succession plan, I don't think you're going to leave in the next 5 years either. So, I'm concerned year 12, we won't actually be done. And so, that's fine if you don't want to leave. But again, when...if your next-generation actually does have a little bit more of that on entrepreneurial drive and hunger or they've gotten established and built their careers and built their confidence, and now it's showing up for the first time. If you don't figure out how to do something to incorporate the more entrepreneurial advisor, they will eventually leave.

Maria: Absolutely.

Michael: Not all will, cause some are just give me a stable job and a stable clientele to serve and give me my salary and I'm going to live my life. And we're all good. So not everyone leaves. That's very specific to who your advisors are, but if you do have the up and comers as you're noting if you do have the up and comers, they're not going to wait for you to play out this slow transition. Or at least, you have to write it out how it's going to look and you have to be prepared for the possibility that your slow transition means eventually you’re their employee as a 70-year-old advisor.

Maria: Right. Yeah, absolutely. Yeah. Great point.

The Most Commonly Overlooked Details In Succession Planning [1:06:59]

Michael: So, as you've just have done this and consults around this over the years from what you're doing now at Transcend, what you did for the better part of 20 years at Commonwealth. What do you find advisors that just don't understand or miss most often when it comes to these succession planning conversations?

Maria: Oh, wow. Well, I think that what comes to mind is that...something I mentioned earlier is that I think they go at it backward. I think they tend to anchor on numbers and anchor on a number, which they think is the value of their firm, and then try to shoehorn everything into rationalizing that number. And I think they do themselves a tremendous disservice for a number of reasons.

One, most of the time, they came up with that number by reading some article about whatever the prevailing multiples are, and then assumed that multiple makes sense for my business. And multiples of revenue are really easy to use. Everybody can do that math in their head, but they are outputs of more detailed analysis of specific businesses and they are also averages, right? So, we don't know how many firms make up...contributed to that average. We don't know what the construct of those books of business were to have them end up being whatever their own multiple was.

A multiple should be an output of a more detailed valuation and analysis of your own business, whether that's discounted cash flow or the income approach or however you want to get about it, the multiple should come out at the end and everybody would have their own. Right. And so, you'd end up with your own multiple, and then, your own multiple makes sense. But most people aren't using their own multiple. They're using some industry average that who knows what. And so, it's kind of bad data in my mind thrown on a good book of business, potentially. And so, I think that the initial approach is off. And that then trying to then rationalize that number to come up with a buyer and terms of the deal, it just all backwards.

So, I really think what advisors miss is the importance of the qualitative aspects or what I would term the qualitative aspects of a transition, and what really makes these transitions successful. And successful transitions happen with an enormous amount of alignment. Alignment certainly on personal values. You've got to like the people that you are you're in conversation with. They have to share your same values. As we said earlier, they have to want to instill a very similar culture to what you have created. However, you would define that for both your clients, as well as for your staff members. They need to share a philosophy about client service and client experience so that when your clients do transition, it's not a shocking experience. They're not going from four meetings a year, and they can call you whenever they want to. You can fill out this web form and somebody will get back in touch with you.

You have to have a lot of alignment in terms of the client experience for it to stick because client retention usually factors into the best-built succession plans. There's some contingency around retention numbers. And so, you want to be able to ensure that the clients are going to stay on and that they have a reason for wanting to stay on. Clients need to see themselves too, in the successor. Clients that have seen them themselves in you and in your team. They also need to be able to see themselves in your successor firm. So, as you think about family members and having multiple generational households, is your successor a multi-generation advisor firm. Can your clients' kids see themselves across the table from themselves, or grandkids see themselves, and do they have services aligned to service them, service their needs?

So, some of that sort of, like I said, qualitative stuff, I think, is so important, but advisors in my experience come to that conversation late in the game. They get way too hung up on the numbers too early. But if you have a good conversation around alignment and then start to do your due diligence, and then look at, well, then what is the value of this business really worth? And then, what is the price that makes sense? Then, you come into it from that angle. I think you have a much greater chance of a successful deal being struck than if you go at it in the other direction.

Michael: And so, I guess, where does that start? Cause I’m struck, so much of this, to me, is starting with we didn't get a good valuation upfront cause we used general numbers in the industry and then kind of backed into that. So, I feel like part of this is that you're framing up as well is we should also just all be getting separate valuations or separate valuations on ongoing basis or at least a separate valuation as soon as you're thinking about this? How should we be approaching the valuation issue if...read the industry average is not the good approach.

Maria: Yeah. And I mean, I think that the industry averages are great from a casual standpoint to say, if you're just kind of wondering, "I wonder what my business is worth." And so, you apply some multiples and you'll get somewhere in the ballpark and that's fine. But if we're talking about constructing a deal, I think they're very poor mechanisms to use. So, I encourage advisors to get a formal valuation from some of the industry players that you know about, FP Transition, Succession Resource Group. They put out great quality valuations in my mind. They rationalize them and explain them in a really thorough way. And there are different levels to the valuation services that they offer based on what it is you're looking for. And if you're looking for that casual, “Hey, I kind of wonder what my business is worth,” they have that, and it doesn't cost a lot of money.

If you're looking for valuations for a succession plan, particularly internal succession plan, they have sort of a stepped-up valuation service for that. And then, if you're looking for valuations for divorces, which is a whole other thing or some other scenarios that might involve a real deep dive on the business, they can certainly go to that level as well. All of them are certified valuations by a certified valuation analyst, a CVA.

I think it's well worth of money to do that, to have somebody really look at what your business is all about, and what are some of the KPIs that are driving that value. Because in understanding what those KPIs are, then you, as an advisor, have the opportunity to move them. You have leverage then to figure out, how do I want to improve the value of my book over a period of time, they can help you understand which ones would make the most sense for you to pay attention to based on their KPI analysis. So, I think a formal valuation is well worth the money for anybody who is at the point of seriously considering a transition plan and putting a succession plan in place.

Michael: Now, do you advocate doing these more regularly? Cause I know there are some consultants out there who make the case, you should go get a new valuation every year and handle this on ongoing basis. Are you an advocate for the more regular valuations and given the associated cost? Or more of the, just look, if you're really thinking about succession planning, to get started re-anchor your expectations to reality. Go get a real valuation so that you're entering this with the right mindset when the time comes.

Maria: Yeah. I'm more of the latter. I know there are folks that like to do it annually, and I think that that's...it's totally fine. But I'm more of a get a good valuation, get a solid, detailed valuation of you business so you know where you're starting from, depending on your timeframe. If your timeframe is two, three years out, that might be all. You might need one more valuation as you get closer to actually executing it. If your timeframe is 8, 10 years out, you'll definitely need another valuation further on down the road.

But I think starting off with a certified valuation to really know kind of what you're dealing with and what might be possible for those next gens like we talked earlier. Can they even afford some of these eight, nine-figure things? It's good to know that out of the gate because that will tell you pretty much whether you can look at one buyer or whether you need to be looking at multiple buyers or whether you need to be upstream and looking at a larger firm to acquire you or for you to merge with, and then, eventually be acquired depending on how they want to structure it. But I think starting off with a really solid valuation is important.

The Low Point On Maria’s Journey [1:16:42]

Michael: So, what was the low point for you on this journey of building your career and doing practice management consulting with advisors?

Maria: Wow. My low point? What was my low point? Well, I think it was probably last year after I'd left Commonwealth and was still not knowing really what I was going to do. Starting my own business was not my first thought. I thought I would re-enter the corporate world and keep doing that. But it was very apparent that I had no interest in doing that. I could not muster the enthusiasm or interest in having a conversation about going down that path.

So, I really started questioning whether was I done? That question came up a few times. I'm like, wow, is that it? Am I done? Or is there another way? And so, I think it took having a number of conversations with advisors who've become very good friends of mine, as well as family and friends for me to think about starting my own business. And my husband is my business partner in part, because he has a completely different background than I have. And so, we bring...he brings complementary skills to the table. The stuff that I really don't like to do, he loves to do, absolutely loves to do. He's an entrepreneur himself. He's a creative. He comes from the film industry. He won an Emmy. So, he's just very creative, and he has a different way of looking at things.

And so, as I started talking with him about what might be possible, then sort of this whole new vision of what my career could look like came about. But I was pretty...I was kind of at a loss there for a while. And just not knowing whether I could keep doing it, and if so, how I would be able to do it. And I am so grateful for the advisors that I have come to know and come to cherish over the years who reached out to me and almost to a person, their first things was, you just need to do this on your own. And I didn't... I thought they were crazy. I've never done anything like this. I have no idea what I'm doing. It's frightening. It's scary. I don't know what to do, but they continually encouraged me and getting that support.

Michael: You've got the expertise, just go get paid for it. It should be straightforward!

Maria: Right. It should be, it should be. But how do I do that? But my husband had been down that path before, so he knew. He's like, "I know how to do this." So, I was just... I'm blessed to have complementary skills with him and to be able to build it together. I could not... I give so much credit to people who do it on their own. I know there are a lot of people who are literally doing it on their own. And I commend you. I do not know how... I don't know how you do it. I wouldn't be able to do it. So, it was a low point probably about a year ago. Definitely.

The Services Maria Offers To Advisors Looking To Build Succession Plans [1:20:11]

Michael: So, now that you're fully launched, I mean, we touched on this briefly at the beginning, but can you just sort of come back and fill us in now of just what do you do now? What do you do for advisors and how do advisors engage you? How does it actually work?

Maria: Yeah. So, I talked about how I want to meet advisors where they're at, and I want them to know that although they're in business for themselves, they don't have to be in business by themselves. And that they can have a partner who's going to help them to build whatever they envision as being a successful firm.

Some people ask me, "Well, what do successful advisors do? Well, what do you mean by success? What does that mean? We talked earlier about how a few thousand advisors in a room, there are a thousand business models. There are a thousand definitions of success. So, I work with advisors who tend to have two qualities. They are successful because they are very focused. They know exactly what they do and what they do best, and they know for whom they are best suited to do it. So, they're focused in terms of who they serve and how they serve them.

And then, the second attribute that they have is that they are always taking action. They're always doing something to continue to improve themselves, to continue to grow the business. And so, it's not about AUM, it's not about revenue, it's not about clients. It's not about whatever. It's really about what that individual advisor's vision of success is, being super focused about what that looks like and who it serves, and then taking action consistently, continually to bring it about. And so, those are the folks that we work with best.

And so, the way that advisors engage with us, it's either a lot of word of mouth. They've heard from somebody that has known me from the past or is working with me right now and they like some help, and we just sit down and we explore what's going on for them. And then, I don't have a prescribed process that I put folks through. I very much want to meet advisors where they're at and figure out a bespoke approach so that we are able to address the things that are most important to them.

And so, we go through a process of discovery to learn all of that. We go through a process of exploration of what is possible, what options might be out there. We then prioritize. How those options fit in with who they are and what they're comfortable with and what they think they're capable of. Then, we decide on a course of action, and we create an implementation plan, and then, we start to help them to execute on that. And it then might shift from a consulting engagement over to a coaching engagement.

Michael: So, you'll work with advisors sort of upfront to consult through issues as well as coaching over time and in helping them follow through and implementing that?

Maria: Yeah, absolutely. Absolutely. I think of Transcend as having sort of four business lines. One is the consulting side. Second is the coaching side. A third is, believe it or not, HR. The consulting, especially around succession planning, has engendered a lot of conversations about organizational design and whether they have the right seats to find and the right people in the right seats. And so, as an offshoot of those engagements, we've been working with advisors to help them recruit and place candidates into positions in their firms. So that is going gangbusters and is kind of a thing of its own, it feels like. But I think it helps to provide continuity throughout the entire process for us to start with that consulting and then work with them through the whole HR placement.

And then, the fourth thing that we are in the process of developing is around programs. We've been asked by a national RIA firm to build a six-month program focused on internal growth. And so, we're designing that program right now. And we're super excited about that and helping them to instill a culture of growth within their own firms and help their up-and-coming, mid-level advisors to refine and to hone their skills around generating referrals, around focusing on share of wallet, looking at retention and how they can most effectively do that within their book of business. So those are sort of the four pillars, if you will, of Transcend PM right now, but most advisors come through that consulting sleeve. Because they have a problem, it's front of mind for them and they want to have help solving it.

The Advice Maria Would Give Younger, Newer Advisors [1:25:19]

Michael: So, what advice would you give younger, newer advisors getting started today and trying to get them off on a good foot?

Maria: That is a great question. As I've been talking with candidates recently in helping advisors place like associate advisors in into positions, one of the things that I try to vet for is, can this candidate take the long view? Can they see the opportunity available to them certainly today, but also two, three, five years from now? And can they see value and take joy from the process of evolving along a development path that would allow them to participate in those opportunities?

Because I think some of the comments that I get from folks is they...maybe they don't know what they don't know. And they might overestimate how qualified they are to step into that advisory position today. And so having the self-awareness, and maybe even the humility to be able to say, "There's a lot more I can learn, and there are advisors out there with tons of experience who are willing to share it, and I'm going to be patient and be a sponge and go with the flow and understand that there's a process of development that is going to get me to where I want to be maybe on a different timeframe I think want, but once I get there, I'm going to be so much stronger and so much more capable of doing the kind of great work that I want to do for clients once I get there."

And so, it's sort of a patience, taking the long view, delayed gratification, self-awareness, I guess, is the big thing that I would say to younger folks entering the industry. There is a ton to learn. It's not all about product. Very little of it is about product really at the end of the day. And there's just so much that these seasoned advisors can and are willing to share with you about how to really step into the role and the persona of a successful and compassionate financial advisor.

What Success Means to Maria [1:27:45]

Michael: So, as we wrap up, this is a podcast about success and one of the themes that comes up you'd mentioned earlier, Maria, is just different people have different definitions of success in the first place, sometimes even changes for us through our own lives. And so, you've had this wonderful, successful career of providing practice management for advisors and now in a new form and incarnation and with Transcend. So, I'm more wondering at the personal level, though, how do you define success for yourself at this point?

Maria: Have my questions come back at me, right? I define success now as being able to do work that I love with people I respect that is integrated with who I am as a human being, the values I hold as a human being, and the responsibilities that I want to fulfill for people in my life. Whether that's on the personal front or the professional front, success, to me, is about finding an integration where the work I do and the life I live are of a piece, and they're woven together. I kind of bristle at this work-life balance phrase. It seems to make it a binary thing. You're either working or you're living life. That seems just on the surface. It's crazy. I think it's about integration and making your work be a reflection of who you are and how you want to show up to the world and the contribution that you want to make to your community and the people in it. And I hope that I'm able to realize that definition of success through Transcend PM.

Michael: I love it. I love it. Well, thank you so much, Maria, for joining us on the "Financial Advisor Success" podcast.

Maria: Thank you for having me, Michael. This has been a very enjoyable conversation. I've had a great time. Thank you for having me.

Michael: Likewise. Thank you, Maria.