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  • Succession Planning goes beyond the Practitioner

    The focus on Succession Planning for advisors and agents is thick, almost overplayed and so loud the message is being lost. But there is silence when it comes to the situation and impact on Independent BDs and FMO’s. It only stands to reason with a shrinking advisor population, accelerating over the coming 10 years, that the organizations tasked with product distribution AND compliance oversight will come under pressure for income. If they do not recognize the inextricable relationship between themselves and the health of the advisor population the outcome is predictable. OR – they can adapt and embrace a huge opportunity and grow as the market shrinks.

  • Experience vs. A good night sleep

    There is a very smart and catchy TV commercial for a large hotel chain that makes me think about the approach that our industry is taking to succession.  I am sure you know the ad where an individual is performing some highly skilled service with a client [Dentist, Acupuncture etc.] only to reveal that they are not a Dentist or an Acupuncturist along with the catch phrase”….but I did stay at a Holiday Inn Express last night !”  The inference being there is a nothing as powerful as a good night’s sleep.

    With the ageing demographics in our industry and a distinct shortage of new entrants as planners, the probability of increased transaction volumes is high. Someone is going to buy the books and create regionally stronger, larger firms. But businesses are NOT all the same.  The Financial Planning industry and its counterparts are unique in many regards and understanding the nature of its characteristics is not only important – it is essential to the success of a transaction as measured in the eyes of the buyer and seller, and the Clients.

    There is an old adage – “Those that can – Do, those that cannot – Teach!”  How many  succession transaction advisors do you know who have an experiential view that they offer in a business advisory role?  It is probable that the majority of advisors you have contact with are Teachers first, Practitioners second.

    A major concern for either a Buyer or a Seller is the nature of the assets being sold and the terms of the transaction. The primary assets are intangible – that is to say they cannot be touched in any real way and cannot be used as conventional collateral. The terms of the transaction will be tied to the projected performance of the assets and may be paid out over an extended period of time.  So as a buyer you expect and will demand the performance of the assets equal or exceed your projections for the business you are buying.  As a seller you expect to be paid the money agreed on as the buy price and in the specified period.  This will not happen if actual new cash flow does not cover added costs including the debt service.

    Does your advisory team understand Regulation SP? Have they prepared and executed a transition plan for 100’s of new clients coming across the BD channel without losing sight of the implications to cash-flow and expenses. Before entering into the transaction did you plan and allocate resources suitable for the firm’s continued operations while  taking on the new clients and maintaining the same level of service?

    Buying and selling a book is a partnership and demands effort on all sides – it is not an ad hoc affair that simply happens because two parties want it to. It is complicated and time consuming.  It can be very rewarding but it is not without risk. Risk mitigation requires planning, preparation and execution management.  The impact of a failed transition can be catastrophic – with all parties feeling that they are victims to the other side’s misrepresentations or inadequate planning and execution. The bottom line is that no-one wins.  You may reassure yourself with the thought that “The contract will protect my interests.” A legal judgment might be the outcome of a conflict – however it will not be a timely decision. The legal process is a long winded, demoralizing process.   While arguments are being heard in court, lawyers are billing time and your business still has to be conducted.  It is far better to assess the potential risks and plan for them ahead of time.

    So when it comes to assembling advisors to assist you when looking at buying or selling a business, ask the questions with regards to their experience and knowledge of completing deals in our Industry. If they reply “I have not personally completed a deal in your industry BUT I did stay at a Holiday Inn Express last night…” look a little further – the benefits will be well worth the added time for due diligence in making a selection.

  • Hard times for some – Boom for others

    I have just returned from a trip to California. Those who do not live there may be pleased to know that the State is on the mend. The budget turned a surplus this year, commercial projects in the Bay area are humming and housing prices are soaring. San Francisco is up 15%. For a light distraction before my first appointment I went to an open house in a modest neighborhood. The immaculately “Staged” 3,200 sf home on a 10,000 sf lot was priced at $2 million – and a cell phone bidding war started as I was asking for a spec sheet! In Fort Collins Colorado that house might fetch $425,000.
    So you might expect that my contact would tell me that business – I mean real business – was booming and driving the wages that pay for these mortgages. Alas, he recounted sequester woes, and a shortage of skilled, motivated, labor. After 22 years he wanted out – now. Our initial interview revealed that he had done nothing to prepare for his exit. There was no heir apparent, no time to do an ESOP, no key man insurance, no cross purchase agreement with a minority stock holder. I asked what he wanted to do in retirement and he did not know. After a lifetime of engagement in the gaming industry he had no hobbies.
    But all was not lost. A review of assets included a deep Rolodex of customers, suppliers, and consultants, plus intellectual property, and real estate. We discussed the possibility of downsizing a core operation and relocating to Colorado, where he could live in a palace and breath air you cannot see. The remainder of the company could appeal to a strategic buyer whose interest would include access to trade secrets that the owner took for granted.  I left him with a personal vision template to create a written description of what a lower intensity life might look like.  That prospect ended the meeting on  high note.
    The take-away from this post is that we can all benefit from the perspective of an objective appraisal of our business assets and what we want to do with them. Hard times expose weaknesses. The trick is to have a plan with enough time in the process to pick your exit date and avoid a fire-sale.


  • Benchmarking for Performance.

    Benchmarking can refer to an exercise where a comparison of performance is made against a “Best in Class” individual or organization. If I were to benchmark myself in the 100 meter sprint against Usain Bolt, he would be the 10 and I would be a 1. Only because fractions are not allowed…

    In business, benchmarking is a very useful and relatively easy exercise to undertake. It separates management perceptions of performance from reality by comparing standardized measurements against a recognized “Benchmark”.  These can be as broad as your business model requires but they do need to be standardized measurements. If your management team is measuring something that no-one else cares about, there really is no value.

    Sales, Income, COGS, and ROCE etc. are all standardized metrics of management. They are good points of reference. Are you above or below the mean and by how much? This will lead you to ask other questions, mainly why? Why are we ahead or behind? The follow up question is what.  What are we doing differently? Lastly how. How can we gain on the benchmark company or protect the edge we have over it?

    If your performance is better or worse than the benchmark, it is good to know with some level of certainty. Knowing, not assuming, you are ahead or behind is a validation of what you have done. However, the real managerial benefit is in being able to separate the methods and strategies that affect your performance against the competition. Knowing enables you to protect your edge and build on the success. Bare in mind it is just as easy to lose ground as gain ground if you operate on a coin toss and carry a rabbit’s foot.

    Think about Nokia and Apple. Nokia was once the absolute benchmark for cellular telecom. Today it might be argued Apple has taken that spot. But together the average level of managerial performance would represent our industry benchmark. Throw Motorola, Samsung and Rimm into the mix and now you can see that the combined data set is a clear representation of industry performance, not value but performance.

    Now look back 12 years and would Nokia have been above the average and Apple below. Today that benchmark as an average of the constituent parts has not changed a great deal but the situations of the participants around it have. Apple is now well ahead in most managerial criteria and Nokia behind.

    Where do you find a benchmark? Most benchmarks are an accumulation of data from within an industry sector – typically provided anonymously by CPA’s who work with clients in the space. In aggregation these data points create a performance map and provide an average level of performance in all the key areas of management. The term average does not sit comfortably with some and it has to be understood that an average is simply the line at which we can be qualified as either the “Best of the worst” or the “Worst of the Best” and by engaging in a benchmark against your industry peers you are determining your relative position. These benchmarking services do not rank you definitively against a single target, but they point at comparative managerial strengths and weaknesses.

    In our work with financial services advisors who wish to either sell or buy a business, valuation is a primary issue. If I were to take two firms, each with the same GDC, the same number of employees, and similar client counts, current doctrine would have each firm valued as equals. I will argue, and do frequently, that this doctrine is utterly wrong. This method takes no account of the managerial performance underlying the revenues.  It assumes every other aspect of the business are equal – it assumes an industry average of management is present. Before you assume your firm is worth $X, or that the firm you wish to buy is worth a multiple of its revenues, step back and ask yourself, “Is this an average business, above or below, in its operational capability?”

    Only a deeper dive into the firm’s performance will tell the truth and Benchmarking is an easy way to begin that exercise.

    Eighty20 uses Financial Services benchmarks. Profit and loss, and balance sheets are segregated by revenue levels and by practice specialty. The following baseline reports are available to you for FREE .

    Financial Planners – Revenues of ~$1.0M

    Financial Planners – Revenues of ~$1.0M to $10.0M

    Financial Planners – Revenues of ~$10M Plus

    Insurance Agents and Brokers – Revenues of ~$1.0M

    Insurance Agents and Brokers – Revenues of ~$1.0M to $10.0M

    Insurance Agents and Brokers – Revenues of ~$10.0M Plus

    Download Benchmark Report

  • The Irony of Advising

    So as part of the Eighty20 business development strategy we had determined some time ago that a site dedicated to the Industry and the movement of skills, assets and employment would be a really solid idea. All driven by the underlying premise of succession. This would sit alongside the Eighty20 Advisory Platform. Our belief being that managed succession events are the catalyst to opportunities downstream in the industry.

    Assets change hands, positions open up for advancement, new advisors are needed to fill the junior positions. So we set out to create our vision; On the whiteboard it looked great and the web developer nodded positively when we told them we had a timeline we wanted to hold to. And then the clock starts ticking and the reality of articulating a vision of a business into actuality within the nebulous medium called the WWW came home to roost.

    Deadline one slips by but its ok, we are 85% of the way there. Deadline two slips by but I think that’s fine we are 90% of the way. And so the pattern continues right up to the point where I was finally comfortable to the degree that was happy to release the site. That was yesterday. As I sat with the developer yesterday and signed off on the finished product in a somewhat rhetorical sense I asked him, “So how come 20% of the work took 80% of the time?” He looked at me and replied, “You’re asking me that question?”, “That’s where all the value is created!”

    I had to laugh at myself for asking the question at all. As advisors to business owners we often take a rather vaulted perspective and can often over simplify a client’s situation based on our own experiences in “Similar” situations. I have had the opportunity in the past to build hard products, machine tools that are very tangible and in building the new site had looked at the development process in a similar manner to building a machine.

    But without the metal I had estimated the time as being significantly less. The reality and the lesson is that cutting metal is no harder to do than creating code, stylizing machines is likely easier than capturing the feel of a website and dealing with web developers can be just as much fun as with engineers. Our experience in retrospect has been a very valuable one, the end product we are proud of it and hope our goals of serving the industry are met.

    We invite you to visit the site and as always invite your feedback and suggestions. Very best wishes to all for 2013.

  • A Student body’s opinion of financial services.

    Occasionally I have the opportunity to speak to the business class at CSU on a business related topic. Today was one such occasion, with two classes, and the subject for the day was Valuation and why young business owners need to engage and understand the basic concepts.

    I enjoy the chance to speak to these classes and always encourage a two way dialogue as far as time allows and ask the students as many questions as I get asked. I truly believe that the level of education being provided in these business classes prepares the students with a very solid foundation in running and operating a business.

    They clearly understand the issues of structure, cash flow and marketing and therefore are equipped to make a lifestyle or financial choice when determining what type of business they wish to pursue. Income versus vocation. As the class progressed we reviewed a particular statistic I use to emphasis the issues/opportunity related to supply and demand, specifically where the demographic of the likely sellers of businesses outnumber the probable buyers. There is more supply than demand and this means an advantage for the potential buyer [i.e. these class participants at some point in the near future].

    The sellers are Eighty20 Advisor’s typical client. I described how this type of imbalance can affect valuations even when the fundamentals of the business do not change. In the market we serve, Financial Services, the big issue is younger participants choosing occupations other than financial services. I asked the question. “Who here wants to be in financial services?”

    In two classes there were a total of some 45 students. None of them raised a hand! I pushed the point and asked again with some level of humor to disarm a potential shy group and again no-one raised a hand. I went on to explain the potential benefits of buying a business that has clients, revenue and operational history rather than starting from scratch. Nothing! This was true for both classes so it could not be put down to 8.00am malaise alone.
    I asked the question differently “If you had the potential to earn $250k a year – would you consider taking a position or looking more closely at Financial Services?” 70% of the arms shot up.

    I realize this is not a fair question and has a clear bias toward financial gain rather than a genuine desire to become an advisor straight out of college. But I do know that the number of advisors earning $250k a year as a percentage of the advisory community is far higher than many other professions and so if financial gain is a real motivator – financial services is a real opportunity for many of these students.

    It’s clear from this simple and spontaneous survey that the industry we all work in has a “bad rap” and is not foremost in the minds of many soon to be graduate business students. If the hot topic of the day “Succession and recruitment of the next generation” is to be addressed at the grass roots level we all need to get more closely involved with the academic community – not just the finance classes, but all business related curriculum classes.

    You should participate with your local university and honestly represent what you do and how you do it, the good and the bad and the benefits. Then encourage others around you to so the same. The more Advisors who share their experiences, the sooner the reputation of our industry will start to change for the positive.

    If you do not have a relationship with your local schools – reach out and you will be welcomed I am sure. The academic world more than ever needs to forge relationships with the outside world and the returns are truly positive for all who participate. If you do have a chance to get involved but need a PowerPoint – let me know, I am happy to share the various topics we have developed and use.

    And thank you for sharing your time and energy in developing a positive reputation and encouraging the next generation.

    Allen W. Duck.

  • A view from the conference floor.

    Financial Practice succession – Perception and Reality.

    I recently attended a national conference for one of the larger Independent BD’s. The number of attendees was impressive as was the lineup of speakers and opportunities to learn. An event well worth the time and energy it takes these days to tolerate air travel.

    I had been told long ago by a boss of the day “Allen the reality of a situation is not relevant unless those who are affected by it, understand it. If the perception of the group is that they are unaffected, then their Perception becomes Reality.”

    And so my favorite phrase is “Perception is Reality”. At the meeting the interesting take away from the sidebar conversations is the many and varied perceptions people have with regards to their businesses succession prospects. The one undeniable reality is that attendees were age biased and there was no shortage of grey hair.

    As a company we have a vested interest in the group as a whole for a simple reason, a significant number of the advisors we meet will retire in the coming decade, either by choice or by demise. We wish to serve both the younger generation of planners who desire growth as well the retiring advisors who “should” be planning an exit. It only makes sense to establish a conduit that supports the desires of the Next Generation while meeting the needs of the Now Generation who are in the twilight of their careers.

    My takeaway from the meeting was that the industry is vibrant and continues to walk a disciplined line with regards codes of conduct and keeping its advisors educated. But the nitty gritty of what the industry is going to do for assistance to the succession/acquisition aspirations of the advisors who make up the majority by number, if not by AUM, is an issue. Some BDs are trying to answer the question of what you need to do. This is good in that it creates the basis for a dialogue.  The issue of “How” you execute the process is complex, and the concern over “Who” you select as buyer/seller is more complex.  In the coming months we will roll out a program which aims at making the process simple and mutually beneficial for the community as a whole.  Watch this space.

    If I follow my own mantra and believe that my perception is actually a reflection of reality – Financial Planning is maturing as an industry and part of that maturation process is that smaller firms need to prove their institutional/operations credibility, independent of the personal performance of the owner.

    Then the foundation for a rational process for succession is simplified and in large part standardized.  A solid foundation for succession in a practice allows fulfillment of obligations to the firm’s clients well beyond the day the founder retires. At the same time it creates an executable template that we can all understand.

  • Fort Collins Fire

    The Fort Collins fire is a national event – over 1000 fire fighters and more than 50k acres burned. It is rumored the effort to quench this thing may take the whole summer, unbelievable. The focus is on the homeowners and the property loss, as it should be. However it raises an interesting and difficult subject from the stand point of small businesses who rely on the River for income.

    I kayak and was talking to the guys in the local kayak shop the day after the fire started, I had wanted to go up to the Poudre and paddle but was informed the main highway that runs parallel to the river was closed. It was a precautionary measure and to allow the firefighting effort to be managed unhindered by curious bystanders. He explained that it was a “pain” in so much they had to cancel some rafting trips for that day, Sunday. It is now 5 days later and the Fire has actually crossed over highway 14 and there is likely no rafting, kayaking or hiking on the Poudre for a long time.

    Fort Collins Fire

    There are 4-5 rafting outfits that work this area and they and their employees are now without revenue or income due to events completely outside their control, unforseen? maybe not but expected? no. The thought a week ago was a possible interruption of revenues for a day or two, now it may be the whole season. I would guess these businesses all have liability insurance, P and C insurance and general coverage related to their buildings and vehicles etc.

    I would also guess none of them have business interruption insurance, the Aflac of business coverage, and without it they may be in very serious trouble. This may be a once in a lifetime event, a black swan of fires – but it only takes one to draw a business into a situation that is difficult to recover from. We can see the smoke plumes from our office and extend our absolute best wishes to those affected by the fire and those fighting it 24/7. As well we hope to back on the river as soon as we can and to be sharing it with the small business owners who depend on it.