This white paper discusses five steps for successful succession planning for advisory firms: 1) define goals, 2) weigh options like selling, merging, or internal transition, 3) structure the transaction and transition, 4) check for compliance, and 5) communicate the change to clients. It emphasizes starting succession planning early, identifying a worthy internal successor, and creating a formal plan to protect clients, employees, and the firm's value.

1. WHITE
PAPER
Succession Planning
for Advisory Firms
Five Steps to a Successful Transition
and a Secure Future
Advent Software

2. TABLE OF CONTENTS
[03] Succession Planning:
Heed Thy Own Advice
[04] The Five Steps to a Successful Transition
1. Define Your Goals
2. Weigh Your Options
៑ Selling Your Business
៑ Merging with Another Firm
៑ Transitioning Ownership Internally
៑ Choosing and Grooming Your Successor
3. Structure the Transaction and Transition
4. Check for Compliance
5. Communicate the Change to Clients
[07] Technology and Continuity
[08] Conclusion: Plan Now, Play Later
[08] About Advent Software

3. advent.com/blackdiamond 05
Succession Planning:
Heed Thy Own Advice
Having spent their whole careers helping others plan for the future,
many investment advisors find themselves without a plan for their own.
With the majority of RIA firms now run by people in their fifties, the
issue of succession planning has taken on greater urgency as the indus-
try has matured. Recent surveys by custodial firms report that at any
given time, a majority of advisors do not have a succession plan in
place. Most, however, hope to pass their practice on seamlessly to a
worthy successor, reaping the rewards of a life’s work and causing
barely a ripple in performance or assets under management.
If so many advisors have a similar vision, why aren’t more of them actu- Retirement may seem like
ally taking the steps necessary to make it a reality? Planning also takes a long way off, but what
time, and that is a precious commodity for busy advisors. Younger would happen to your firm—
advisors in particular may feel they have more immediate and pressing and your family, clients and
demands and that the question of succession is years away. Those employees—if you were hit by
nearer to retirement age may simply be unprepared psychologically to the proverbial bus tomorrow?
imagine handing the reins to someone else.
Nevertheless, a formal succession plan is important for a variety of
reasons. First and foremost, of course, is looking out for the financial
security of yourself and your family. Other people, however, also have a
stake in your decisions. Clients are more likely to stay loyal if they are
reassured that a plan for continuity is in place and they can expect a
smooth transition to new leadership. If you have employees, they too
will want to know whether they have a future with the firm after your
departure. A plan for continuity may also add to the market value of
your firm by lessening the likelihood that it will lose clients and assets
once you depart. Last but not least, regulators are likely to look more
favorably on firms that have a succession plan in place, signaling that
the firm is looking out for its investors’ best interests.
Failure to plan, on the other hand, can have unfortunate conse-
quences. You could end up in a “distress sale” situation in which you
cannot get the full value you expected. And you could be turning your
clients over to a new owner who doesn’t share your philosophy or who
lacks the requisite talent and experience to manage assets effectively.
Deals made in haste carry the risk that they will break down.
And then there is the sobering reality that anything could happen at
anytime. Retirement may seem like a long way off, but what would
happen to your firm—and your family, clients and employees—if you This communication is provided by
were hit by the proverbial bus tomorrow? The unexpected is a key Advent Software, Inc. for informational
purposes only and should not be con-
reason why the time to start planning for succession is well before you
strued as, and does not constitute,
have to. This document will help you start that process by setting out legal advice on any matter whatsoever
the five steps to successful succession planning for advisory firms. discussed herein.

4. WHITE PAPER
The Five Steps to a
Successful Transition
1. Define Your Goals
Transitioning full or partial ownership and day-to-day management
of your firm to others can take many forms. What is the ideal scenario
for you?
៑ Do you wish to ensure continuity of your firm’s operating philoso-
phy, style and approach to clients? If so, that would seem to point
It is not uncommon for to an internal successor who has learned from you and shares your
advisors who love what philosophy. It is not impossible to find such an individual outside
they do to keep a few clients, the firm. It will take longer, though, and require a more thorough
but back away from running and careful screening for the right match.
the business. ៑ Do you intend to “keep your hand in”? It is not uncommon for advi-
sors who love what they do to keep a few clients, but back away
from running the business. You will need to define a working rela-
tionship with the new ownership that enables you to focus on your
clients and their investments.
៑ Are you interested in some form of equity participation after you
hand off the day-to-day operations? If you are confident in your suc-
cessor and the continued growth of the business, this is an option
to consider that will enable you to share in the firm’s success and
build additional wealth.
៑ Do you want to walk away altogether one day and not look back?
That’s a valid choice too. But you will be more comfortable doing so
if you know you’ve left your business in good hands.
Only you have the answers to these questions, which may require
some soul searching on your part. Figuring out your ideal scenario in
advance will influence every other step and decision in the process,
including your choice of a buyer or successor and the terms of the
transaction.
2. Weigh your options
Assuming you don’t want to simply dissolve the business at some point
in the future and send your clients elsewhere, there are three primary
options for transitioning ownership—selling, merging or cultivating
one or more internal successors.

5. advent.com/blackdiamond 05
Selling Your Business
Advisors who want a speedier transition and potentially more immedi-
ate financial gain, and who are not interested in grooming a successor,
may decide to find an outside buyer. The key attractions of this option
are quick cash and the ability to walk away from the business and pur-
sue other interests. A sale, however, can result in major cultural and
operating changes that could be jarring to clients and employees—
and cause some to leave. It is especially challenging if the firm is closely
associated with you personally. And principals who are used to calling Careful selection of a
the shots may chafe when they find themselves reporting to a boss. successor and thorough
due diligence are paramount to
Those who plan to sell should focus on creating the type of firm that is mitigate the risk of failure due
attractive to buyers, one that has achieved critical mass and is not to mismanagement or adverse
overly dependent on any one individual to continue operating markets.
smoothly. Sellers also need to put a price tag on their firms. There are a
number of valuation methodologies for financial advisory business, and
an accountant who knows your business well is most likely best
equipped to advise you on which approach is right for you.
Merging with Another Firm
A merger with a compatible firm, particularly one with younger man-
agement, can give you much more control as to the future direction of
the combined firms and is more likely an easier sell to clients. For many
advisors, a merger or “acquire to hire” is a way of bringing in a quali-
fied successor with a book of business and proven leadership experi-
ence from outside the firm.
If your goal, however, is not just to grow the business but to have a
logical successor, the plan must be built into the negotiations and your
due diligence on the prospective partner must be all the more rigor-
ous. And, of course, some mergers go smoother than others; conflict-
ing corporate cultures or clashing personalities can derail even the
most logical merger.
Transitioning Ownership Internally
Internal succession is an attractive option for advisors who wish to
maintain some connection with the firm as discussed earlier—for
example, as an advisor to select clients or a silent equity partner. For
others it is simply the best way to ensure continuity of the firm’s invest-
ment philosophy, operating style, and client and employee loyalty.
In a 2010 custodial survey of RIA firms, most advisors said they would
prefer internal succession of their firms—yet the lack of a designated
successor was the main reason for not yet having a plan.* This suggests
that identifying a successor is a big challenge and, for advisors who
want to go this route, a high priority.
*RIA Sentiments on Business Conditions, Succession Planning and Valuation, TD
Ameritrade, May 2010

6. WHITE PAPER
Choosing and Grooming 3. Structure the Transaction and Transition
Your Successor There are a variety of different financial mechanisms for transferring
firm ownership, most commonly including:
To choose a successor, you first need to ៑ An earn-out, in which the buyer makes an initial payment at an
identify a candidate (or candidates) with
both the proven ability and the genuine agreed amount, and subsequent payments are dependent on the
desire to run the firm. Internal succes- business continuing to meet specified goals. The seller bears a
sors may come from the advisor’s family, measure of risk that the business may fall short of those goals, but
from within the firm, or be recruited from also has some upside potential should the business exceed them.
outside the firm. It may be one individ- Earn-outs protect the buyer from paying full price for a business
ual or perhaps two or more people who
that subsequently falters.
want to be partners. In any case, it
should be someone you have had or ៑ A buy-in, in which the buyer makes an initial payment followed by
will have the opportunity to work with payments over time. Here, the buyer assumes more risk and the
and observe over a long period of time.
seller is assured a certain price upfront. However, unlike an earn-
Grooming a successor and making
clients comfortable with the plan is a
out, the seller does not gain anything if the business outperforms
process that can take years—as much as expectations during the transition.
five to ten years, some experts say. ៑ An equity transfer via an employee stock ownership plan or stock
In the process, the succession candidate options that give successors a degree of ownership on which they
needs to be subjected to a degree of can build and eventually buy out the balance of the seller’s equity.
due diligence so you are satisfied that
he or she is the right person to take over Internal succession transactions also typically entail some type of long-
the business in every way—from creden- term financing in the form of a promissory note or bank loan.
tials and licensing to track record, man-
agement style, rapport with clients, and Of course, there is no guarantee that the business will continue to be
respect from employees. Even if you successful under a new owner. Unforeseeable market conditions can
think you know the person very well, certainly have an impact and there is no risk-free method of transfer-
legal experts recommend a formal finan- ring ownership. That is why the careful selection of a successor and
cial and criminal background check. thorough due diligence are paramount to mitigate the risk of failure
Finally, how will you be ultimately com-
due to mismanagement or adverse markets.
pensated? Is the candidate in a financial
position to buy the business outright—
or will some kind of structured financing
4. Check for Compliance
be necessary? There are a number of regulatory issues to be aware of in the transfer
When you are confident you have a of ownership of an advisory firm. First, the basics: document your due
good succession candidate, you will diligence and get written confirmation that the successor:
want to establish a timetable for turning
over control and gradually reducing your
៑ Is duly registered with the appropriate body (state or SEC)
degree of involvement. Successors may ៑ Has never been convicted of a violation of the Advisers Act
become antsy and question your com-
mitment if the timing of succession is ៑ Is current with all license examinations and certifications
vague. A timetable also helps clients and ៑ Has no conflicts of interest or impediments
employees get comfortable with the
transition and may prevent or limit In addition, prepare to update the firm’s Form ADV when new princi-
defections. pals take over.
It is essential to consult with a compliance attorney or consultant
who can help you understand and address the legal and regulatory
implications of an ownership or entity change. These include such
issues as confidentiality and privacy policies, restrictive covenants

7. advent.com/blackdiamond 07
(non-solicitation or non-compete agreements), licensing and registra-
tion requirements, and continuity of business contracts that the firm
entered into prior to the transition.
The SEC’s primary concern, as always, is that clients are protected—
another good reason to have a succession plan in place well before the
actual succession takes place.
5. Communicate the Change to Clients
You will need to decide when and how it is appropriate to announce
the succession plan to your clients. However, generally speaking, “early
and often” is a good guideline to follow. Reassuring clients that a plan
is in place and giving them time to get used to the idea should help
retain them.
Following the announcement, it will be important to introduce the suc-
cessor to all the firm’s clients, either informally, such as at a reception,
or in a more formal setting such as quarterly client meetings. Few pro-
fessions are as grounded in personal relationships as the investment
management business. Make sure that the time between announce-
ment and actual transition is adequate to allow the successor to culti-
vate his or her own relationships with clients. After all, keeping clients is
one of the main reasons for succession planning, and your client base
Succession planning
is the main asset that the successor has “bought.”
offers a good opportunity
to review, revise and renew
Technology and Continuity your technology framework—
especially if you haven’t done
Continuity is the key reason for internal succession—continuity of
so recently.
investment style, of management from within the firm, of staff, and of
client relationships. That said, continuity of processes and practices is
also important, and that is where your technology platform can be an
asset.
It helps smooth the transition to have technology that centralizes client
data and makes historical data easy to find. Technology provides conti-
nuity in reporting for clients. It helps ensure that composite creation
and performance calculation methodologies stay the same. Transition
within the firm means that successors and staff are familiar with the sys-
tem. And because you are planning for the long term, it is important to
have the confidence that your system won’t become obsolete, and that
it is backed by a provider who will be there to support the new team. In
fact, succession planning offers a good opportunity to review, revise
and renew your technology framework—especially if you haven’t done
so recently.

8. WHITE PAPER
Conclusion: Plan Now, Play Later
Just as you emphasize the value of planning to your clients, the best
advice on succession planning is to heed your own advice. It’s never
too early to start planning for your eventual departure. What’s more, a
formal succession plan is not just a good idea. It is widely regarded as
best practice to protect employees, reassure clients, and even pass an
SEC exam. Most of all, succession planning is about the peace of mind
that comes from setting the stage now, knowing you can comfortably
enjoy the rewards you’ve worked for later on.
A formal succession plan
is not just a good idea; it is
widely regarded as best practice.
About Advent Software
Advent Software, Inc., a global firm, has provided trusted solutions to
the world’s leading financial professionals since 1983. Firms in over 60
countries count on Advent technology to manage their mission-critical
operations. Advent’s quality software, data, services, and tools enable
financial professionals to improve service and communication to their
clients, allowing them to grow their business while controlling costs.
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