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1 The Case for Succession Planning Sameer S. Somal, CFA, CFP® And Lenore A. Reiner, CFP® “Not everything that can be counted counts, and not everything.

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Presentation on theme: "1 The Case for Succession Planning Sameer S. Somal, CFA, CFP® And Lenore A. Reiner, CFP® “Not everything that can be counted counts, and not everything."— Presentation transcript:

1 1 The Case for Succession Planning Sameer S. Somal, CFA, CFP® And Lenore A. Reiner, CFP® “Not everything that can be counted counts, and not everything that counts can be counted.” –Albert Einstein [1879 – 1955] This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

2 2 Disclosure Slide 1 Presentations are intended for educational and informational purposes only and do not replace independent professional advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Blue Ocean Global Wealth or any person, organization, or government referenced. Blue Ocean Global Wealth (or any legal entity referenced) does not endorse, approve, or assume responsibility for, the content, accuracy or completeness of the information presented. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

3 3 Disclosure Slide 2 Views contained in this presentation regarding a particular company, security, industry or market sector do not necessarily represent the views of Blue Ocean Global Wealth, Motley Fool Asset Management, Motley Fool Funds, Foreside Distributors, or their affiliates and subsidiaries. References to stocks, securities or other types of investments should not be considered a recommendation to buy or sell. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. Blue Ocean Global Wealth, Motley Fool Asset Management, Motley Fool Funds, and Foreside Funds Distributors along with their affiliates and subsidiaries, do not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. Under no circumstances should the information provided herein be relied upon as investment advice. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

4 4 Disclosure Slide 3 Blue Ocean Global Wealth, Motley Fool Asset Management, Motley Fool Funds, and Foreside Funds Distributors intend that this presentation will be viewed for informational and educational purposes only. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security or investment. Images, content, and published articles are for reference and illustrative purposes only. Under no circumstances should any image, logo, continent or article be viewed as an endorsement for this presentation or any of its contents. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as legal, tax, or investment advice. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

5 5 Background on Industry Relatively young industry – 12/12/1969 Financial Advisors are seeing their clients retire Fragmented industry This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

6 6 Blue Ocean Global Wealth The supply and demand imbalance of quality financial planning advice. Lack of global professional and intellectual development opportunities for today’s graduates and tomorrow’s industry leaders. A maturing financial advisors demographic that merits an innovative partnership solution. Interdependence of our global supply chain with respect to technology, communication, and human capital. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

7 7 Our White Paper This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

8 8 Naturally, This Conversation Is Hard A lack of standardized options, varying degrees of competency, and a fragmented industry all perpetuate ambiguity and confusion when attempting to formulate a succession plan. How long do I want to serve my clients full-time or part-time basis? What are the principles and core beliefs I need present in order to consider trusting another advisor to care for my clients? Am I concerned about telling my clients about my succession plan, or have they been hinting at their desire for me to have one? What are my spouse’s retirement dreams? Advisors may neglect having the dream retirement conversations with their own spouses, the same one they initiate and facilitate for their own clients. What activities will I pursue when partially or fully retired? Rank and prioritize your succession outcomes: Legacy vs. Time vs. Family vs. Money This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

9 9 Our Mission Effective succession planning is emotionally complicated and deeply personal. The decision by financial advisors to consciously address and evaluate how to retire or transition is perhaps the most difficult one they will make. We hope this presentation will accomplish the following: 1. Engage financial advisors and convey the risks associated with not having a succession plan. 2. Raise awareness among the national advisory community that not having an exit strategy is a ubiquitous, national phenomenon. 3. Provide our audience with pertinent information and, ultimately, a more expansive decision-making framework when personally addressing this industry wide quandary. Cheng, Marguerita M., and Sameer S. Somal. “The Case for Succession Planning”. Blue Ocean Global Wealth, This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

10 10 Agenda Introduction: The Case For Succession Planning Video 1. Background & Framework Contingency Planning Business Cycle Valuation 2. Context & Options Today Demographic context Talent shortage Practice vs Firm 3. Implementing a Succession Plan Preplanning due diligence Transition Innovated solution This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

11 11 Background & Framework The Case for Succession Planning “You cannot build a dream on a foundation of sand. To weather the test of storms, it must be cemented in the heart with uncompromising conviction.” –T.F. Hodge This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

12 12 Blue Ocean National Survey “Advisors take the personal delivery of financial planning and the relationships with their clients so seriously that they are reluctant to delegate to the next generation.” -Kevin R. Keller, CFP Board CEO “We need to plan with certainty for the uncertainty. We need a Plan A, B, C and D and be open to other possibilities. Sometimes people come in and look at succession as a transaction and not a process.” -Janet Stanzak, CFP ®, 2013 FPA President-Elect Stanzak, J. (2013, February 20). Telephone Interview. Keller, K. (2013, March 14) Personal Interview. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

13 13 Triggering Events Attempted sale or transfer Retirement Termination (voluntary or involuntary) Death Disability Divorce Bankruptcy Regulatory enforcement or disqualification Tibergien, Mark C., and Owen Dahl. “How To Value, Buy, Or Sell A Financial Advisory Practice”. Princeton, New Jersey: Bloomberg Press, This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

14 14 Contingency Planning A Contingency plan is a plan devised for an outcome other than in the usual (expected) plan. It is often used for risk management when an exceptional risk that, though unlikely, would have catastrophic consequences. Business continuity planning identifies an organization’s exposure to internal and external threats and synthesizes hard and soft assets to provide effective prevention and recovery for the organization, while maintaining competitive advantage and value system integrity. Financial Industry Regulatory Authority (FINRA) forbids commissions and advisory fees to pass through to a nonregistered spouse in the event of death or disability. “Failing to plan is planning to fail.” –Benjamin Franklin[ ] This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

15 15 Common Problems in Buy-Sell Agreements 1. Standard of value: How is value defined? 2. Purchase-price standard: What is being valued? 3. Silence on the key points: What information is missing? 4. Actions by shareholders: How does management stay informed? Tibergien, Mark C., and Owen Dahl. “How To Value, Buy, Or Sell A Financial Advisory Practice”. Princeton, New Jersey: Bloomberg Press, This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

16 16 Recognize the Risk Most business owners, across industries, ultimately hand over the reins of their practices to a successor too late, failing to maximize value and realize their intended vision of succession. The irony in the advisory business is that we plan for our clients retirement but not our own. When your clients don’t plan for retirement they face a greater risk of missing their goals. Similarly, when advisors ignore succession planning they face a greater risk of mismanaging their enterprise value. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

17 17 Succession Planning & Management Definition: “Succession Planning and Management”, or SPM, is a purposeful and systematic effort made by an organization to ensure leadership continuity, retain and develop knowledge and intellectual capital for the future, and encourage individual employee growth and development”. Similar concepts: Replacement Planning is a reactive approach to staffing that involves identifying replacements for key positions, usually at the senior levels of the organization. The three concepts can be placed on a continuum, with Replacement Planning at one end and Succession Management at the other, with Succession Planning somewhere in between. The differences between the three practices are highlighted below: This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

18 18 Odds Favor No Plan This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. Some statistics: Reasons why companies don’t have a succession plan: (1)Fear of discussing the future beyond the lifetimes of the owners. (2)Fear of letting go and/or loss of s meaningful life. (3)Norms against favoring siblings and difficulty in making hard choices. (4) Employees’ fear of change. (5) The roles of active versus passive family members. Spousal influences. Four phases to a successful succession plan: (1)Initiation: When children, or others, begin to learn about the business and making decisions about coming into the business. (2)Education: Training and educating potential successors and providing a path to growth and responsibility. (3)Selection: Choosing who will be the successor(s), the company’s leader(s), in the next generation. (4)Transition: The timely, orderly and final transfer of control to a successor, which may also include the role, if any, of the current owner.

19 19 Business Owner Clients Need Succession Planning 88% of current family business owners believe the same lineage will control their entity in five years. Only about 30% of family businesses survive into the second generation. 12% are still viable into the third generation. 3% of all family businesses operate into the fourth generation and beyond. Source: This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

20 20 An Intergenerational Quandary Succession Planning If the leadership element is critical to the success of your company, isn’t succession planning a vital part of your overall strategic plan? By Idalene F.Kesner According to a recent Conference Board report. Executives themselves consider succession one of the two most important issues they will face in the near future. Yet, relatively few firms engage in any type of advance succession planning; and still fewer firms have well established plans in place. For many companies, succession planning begins only after a vacancy appears, which means that instead of adopting a pro-active stance, management becomes reactive. What is best handled as an evolutionary process turns into more of a “fire fighting ” exercise. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

21 21 Core Business Succession Planning Breakdown Management Succession Planning: Sales Marketing Finance & Admin Operations Customer Fulfillment Source: Ownership Succession Issues: Leaving the business to a surviving child or spouse Planning in a vacuum – hubris Equitable division amongst heirs and children Technical Mistakes This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

22 22 Overview Mary Kay Inc. is a cosmetics and skin care powerhouse. As one of the world’s largest direct selling companies with more than $2.5 billion in annual wholesale sales worldwide, Mary Kay’s Human Resources Division tracks and manages the performance and growth for over 4,500 full time employees and over 2 million Independent Beauty Consultants selling products in over 35 countries. Solution In late 2009, Mary Kay had finished the successful implementation of Aquire OrgPublisher, their online organization charting solution. Based on the success of the OrgPublisher rollout, Mary Kay’s leadership requested proposals from Aquire on ways to streamline their succession planning processes. Aquire was about to release a new product, Aquire Succession, designed specifically for succession planning and presented it to Mary Kay. Already familiar with Aquire and the value their OrgPublisher solution brought to Mary Kay, a contract was signed to implement Aquire Succession starting in February Jennifer Long, Mary Kay’s program manager for succession planning, was the Organizational Development partner for the Aquire Succession implementation. Long, who coordinated the implementation with Mary Kay’s HR Technology and Information Technology teams over a seven month period in 2010, noted that any new software introduced into the Mary Kay corporate headquarters must meet particular standards: it must be user friendly, it must provide value across the entire organization and it has to allow for custom Mary Kay corporate branding (or as Long called it: “We have to ‘Mary Kay’-ize it for our users.”) Challenge For Mary Kay’s HR, succession planning had become a cumbersome process: databases from two different vendors coupled with a manual data analysis regime that included a patchwork of spreadsheets. And to make matters worse, submitting succession data for a multibillion-dollar company was handled via unsecured Outlook s. Mary Kay knew their succession planning process needed a complete makeover. Case Study on Succession Planning This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

23 23 Leadership Succession Planning Critical but in some ways intangible, ambiguous, and nebulous. Wharton School of Finance Researchers concluded that between 15-25% of the variation in corporate profitability, on average, is directly determined by the character of their chief executives. Studies attempting to debunk the power of leadership concluded that, at a minimum, it must account for at least 7%-14% of performance. Source: This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

24 24 Non-Profit Clients & Prospects Sample Succession Plan Association of Baltimore Area Grantmakers Leadership Development and Emergency Succession Plan 1. Rationale The executive director position in a nonprofit organization is a central element in the organization's success. Therefore, insuring that the functions of the executive director are well understood and even shared among senior staff and volunteer leaders is important for safeguarding the organization against unplanned and unexpected change. This kind of risk management is equally helpful in facilitating a smooth leadership transition when it is predictable and planned. This document outlines a leadership development and emergency succession plan for the Association of Baltimore Area Grantmakers. This plan reflects ABAG's Executive Succession Policy and its commitment to sustaining a healthy functioning organization. The purpose of this plan is to insure that the organization's leadership has adequate information and a strategy to effectively manage ABAG in the event the executive director is unable to fulfill her duties. 2. Plan Implementation The Board of Directors authorizes the Board Chair to implement the terms of this emergency succession plan in the event of a planned or unplanned temporary or short-term absence. It is the responsibility of the Executive Director to inform the Board of Directors of a planned temporary or short-term absence, and to plan accordingly. It is the responsibility of the Strategic Initiatives Director to immediately inform the Board Chair of an unplanned temporary or short-term absence. As soon as feasible, following notification of an unplanned temporary or short-term absence, the Board President shall convene an Executive Committee meeting to affirm the procedures prescribed in this plan, or to modify them if needed. 3. Priority Functions of the Executive Director at ABAG The full Executive Director position description is attached to this plan. Among the duties listed in the position description, the following are considered to be the key functions of the Executive Director and have a corresponding temporary staffing strategy (see Section #3 for further guidance about temporary staffing) This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

25 25 Intangible Capital A.Human Capital Skills Experience Managerial Value C. Structural Capital Intellectual Property Systems Processes Captured Knowledge B. Relationship Capital Reputation Brands Partners Vendors Clients D. Strategic Capital Business Model External Trends/Conditions This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

26 26 Business Cycle 1 The 2008 Financial Crisis was not a typical business cycle trough industries have contracted from a financial and human capital perspective. Lower valuations in the current market cycle because slower economy, less sales/profits, warrants a lower multiple. Discounts can be arbitrarily applied. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

27 27 Grow through acquisition: practice’s value is in its cash flow and the goodwill of its clients— not the bricks and mortar that provide the far more tangible collateral for other types of business loans. A case study: Broker Thomas J. Curtis recounts the struggle of trying to close on under $5 million in financing with a bank in the Tucson, Ariz., region that would allow him and a partner to buy the Raymond James Financial Services practice of a colleague. The two-and-a- half year process had the predictable twists and turns that accompany large lending applications, with the bank rejecting him at one point but six months later inviting him to reapply. The long slog ended in failure last winter when the bank turned him down a second time following an unfavorable appraisal. The good news—in July, Curtis was able to close on financing with another bank, just within 45 days of applying. The bank understood their business better than the predecessor, he says. “’Buildings and equipment don’t make loan payments; cash flow makes loan payments,’” Curtis recalls the lending officer telling him. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. A Case Study

28 28 Business Cycle 2 Behavioral Finance: Anchoring is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”)when making decisions. Supply & Demand: More advisors want to exit (supply) vs. qualified successors and buyers (demand). Markets are inefficient due to investors’ physiological biases. We believe that talented investors can add long-term value by understanding and using this inefficiency. “2008 almost killed me.“ – 2013 Blue Ocean National Survey This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

29 29 According to a preliminary finding from IN Adviser Solutions' first-ever study of Succession Planning in the financial advisory business, three-quarters have never conducted a formal evaluation to nail down the value; not being managed as actual businesses 74% have indicated that they have never conducted a formal third-party evaluation of their firm Most financial advisers — who earn a living advising on the net-worth and assets of others — are not truly aware of the value of their own firms (and quite possibly their largest and most valuable personal asset.) This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. Advisors Don’t Know How Much Their Firms are Worth

30 30 Understanding Valuation 1. Income approach Capitalization of cash flow DCF 2. Market approach Public company M&A 3. Cost-based approach “Intelligent people make bad decisions based on opportunity costs.” -Charles Munger This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

31 31 Key Valuation Points 1. Not all practices are created equally. 2. Future expectations dictate value. 3. No value for what is not transferable. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

32 32 Profitability and Productivity Profitability Ratios Productivity Ratios Gross profit margin Operating profit margin Pretax profit margin Net margin EBIT margin EBITDA margin Number of clients per staff Number of clients per professional Assets under management per staff AUM per professional Revenue per staff Revenue per professional AUM per client AUM per active client Revenue per client Revenue per active client Operational profit per client Operational profit per active client Tibergien, Mark C., and Owen Dahl. “How To Value, Buy, Or Sell A Financial Advisory Practice”. Princeton, New Jersey: Bloomberg Press, This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

33 33 Advisory Practice Example 2012% of Revenue2013% of Revenue Revenue $1,773,000100%$1,914,000100% Direct Expenses$748,00042%$928,00048% Gross Profit$1,025,00058%$986,00052% Overhead Expense$632,00036%$689,00036% Operating Profit$393,00022%$297,00016% This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

34 34 Practice Valuation Methodology ComponentDescription Production Trailing 12 months of income generated by the practice. If buyers are only interested in acquiring fee business, any commission revenue might be excluded from the valuation -Compensation Expenses All salary and salary-related costs like benefits and insurance-aside from any staff working for the practice. The salary paid to the practice owner must also be included in this component. Compensation should not represent more than 75% of total expenses. - Non-compensation Expenses All cost not related to salaries are included here. These include technology costs, operating cost(e.g. custody, reconciliation), office rent, marketing fees and sales materials, consultant fees, travel expenses, etc. =Normalized earnings Normalized earnings should b 30% or higher of total production. This earnings measure is taken as the basis for calculating the practice valuation. xValuation multiplier The practice value is determined as a multiple of normalized earnings. The typical multiplier is between five and nine times normalized earnings, depending on qualitative factors such as the growth rate of the practice, average tenure, and age of clients. The bulk of practices would be valued with around six-and-a-half to seven times normalized earnings. =Practice value Source: Alte Group Analysis, M&A consultants, Buyers This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

35 35 Linking your Business Plan to a Succession Plan A business plan is not a substitute for a succession plan. The two plans are complementary. Protecting your equity and wealth necessitates a succession and contingency planning component. Personal goals and vision should align with business objectives. A plan without details (such as dates, objectives, and stakeholders) can be hubristic. “Plans are nothing; planning is everything.” -Dwight D. Eisenhower[ ] This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

36 36 M&A Databases IBA market database Done Deals Bizcomps Pratt’s Stats Shannon Pratt’s Control Premium Study Mergerstat This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

37 37 Discount vs. Premium Discount Reliance on one key shareholder The average practice is smaller than a ‘micro-cap’ company Mixed productivity results Absence of non-compete or non-solicitation agreements Premium Recurring revenue stream A high-net-worth client base Above-average financial performance This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

38 38 What Is Driving Consolidation? 1. Rising costs among financial firms are causing them to seek economies of scale. 2. Rising demand among wealthy individuals for financial advisers makes the business appealing to banks, accounting firms, financial buyers, and large financial firms. 3. Owners of practices on average are getting older and becoming interested in liquidity through the sale of all or some of their business. 4. In very few communities does one financial-advisory firm dominate the market, making this opportunity to compete even more viable. Tibergien, Mark C., and Owen Dahl. “How To Value, Buy, Or Sell A Financial Advisory Practice”. Princeton, New Jersey: Bloomberg Press, This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

39 39 Context and Options Today The Case for Succession Planning “As a principle-centered person you try to stand apart from the emotion of the situation and from other factors that would act on you, and evaluate the options.” -Stephen R. Covey This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

40 40 US Demographics The numbers tell the story: in 1900, Americans between the ages of 65 and 90 comprised a mere 6% of the U.S. population, but by 2050 this group is projected to comprise nearly 24% of the population. The number of Americans age 65 and older is expected to more than double, from roughly 40 million people today to 89 million people by With 10,000 U.S. residents retiring daily over the next 17 years require expanding social and economic consequences. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

41 41 Demographic Context 1 Maisonneuve, Virginie. “Aging gracefully: What the West can learn from Japan”. Schroders This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

42 42 Demographic Context 2 Maisonneuve, Virginie. “Aging gracefully: What the West can learn from Japan”. Schroders This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

43 43 Financial Advisor Demographics Average age of a financial advisor is % are 60 and older. More than 40% will transition their practices over the next 15 years. Of the advisors who are within two years of retirement age, more than half do not have a written succession or contingency plan. NFP Advisor Services Group. “The Efficient Frontier of Succession: Maximizing Practice Value”. May This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

44 44 A Fragmented Industry NFP Advisor Services Group. “The Efficient Frontier of Succession: Maximizing Practice Value”. May This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

45 45 A Fragmented Industry This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

46 46 Target Time for Transitioning Practice to a Successor By Status This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

47 47 Barriers to Planning Identity Lifestyle Daily personal gratification A sense of immortality Desire to remain in control Ego Lack of trust in a potential successor Fear of retirement boredom Lack of options Time “Picking a successor. Everyone one likes to pick themselves.” Blue Ocean National Survey This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

48 48 Advisors may experience unforeseen consequences down the road if they don't address key business issues such as the aging of their clients, continuity planning, and building scale. An aRIA paper reveals that 50% or RIAs are now 50 or older while 48% of the independent contractors who work with an independent broker/dealer(IBD) are in that age group. The average age of the independent owner is 55, and increasing. At the same time, 80% of RIA clients and 72% of clients in the IBD world are north of 50. Advisors are aging, and the clients of advisors are aging along with them. Left unaddressed, this creates the perfect storm of opportunity and uncertainty. Add to this the fact that most advisors do not have a succession plan, and even if they do, they fail to realize that their plan is not the same thing as a plan to sell, and you have major looming issues. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. The Aging Advisors

49 49 Risk to the Independent Advisor More than 100,000, and 1/3 of the advisory aggregate advisory population in the U.S. are part of the independent channel. This group represents $1.8 trillion in client capital. There is no correlation between the number of years to exit and succession planning design. With less internal succession options, this group, on the whole, lacks proactive succession and contingency planning focus. Financial Network Investment Corporation. “Elite Advisors’ Strategies for Succession Planning”. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

50 50 The Talent Shortage 5% of the existing 316,000 U.S. financial advisors under age 30. Profession is expected to expand by 32%, 66,400 advisors, over the next decade, according to the Bureau of Labor Statistics. Why the industry is expanding - Decline of DB plans - Baby boomer population - Growing proportion of financial empowerment Unique discussion points - Entry into the business - Young advisors support/service role - Lack of ownership ambition This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

51 51 The millions of baby boomers retiring or planning their retirement — also is threatening the financial advisory sector with a talent shortage. The result could hurt advisers as they try to meet growth targets for their firms, as well as make succession plans. A 2011 survey by Cerulli Associates Inc. showed that 22% of advisers were below 40 and only 5% were younger than 30. The average age of advisers was 49.6, up one year from The average for wirehouse advisers was 50.6 The total number of advisers fell to 320,378 in 2010, from 334,919 in 2004 — a 4.3% decline, according to Cerulli. A report by the Bureau of Labor Statistics shows that the number of jobs for personal financial advisers is projected to grow by 66,400 by 2020, a 32% increase that is far larger than the 14% average growth rate for all occupations. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. A Talent Shortage Looms As the Industry Booms

52 52 talent/?utm_campaign=forbestwittersf&utm_source=twitter&utm_medium=social Despite the report about job cuts on Wall Street or yet another hedge fund struggling to beat the market, there’s one financial job that’s remained secure and increasingly relevant in today’s market: the financial advisor. There’s a great shortage of young talent in the financial advisory world: (1)Less than 5% of the existing 316,000 financial advisors in the country are under age 30, according to Cerulli Associates. (2)Existing advisors are on the path toward retirement themselves and looking for younger FAs to take on their books of business. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. One Of The Fastest-Growing Careers Is In Desperate Need Of Young Talent

53 53 Why are there so few young financial planners? The War for Talent - Financial and Human Capital Contraction - Zero sum game - Industry consolidation – MSSB, Bank of America Inadequate Development Programs Perception of top finance grads Lack of Mentorship Economics This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. Wells Fargo Lehman Brothers Bear Sterns Morgan Stanley Smith Barney Merrill Lynch Etc…

54 54 Why the kids don’t want to be financial advisor As an industry, the financial advisory business is relatively young. But its practitioners aren’t. Cerulli Associates recently threw out some numbers to chew on––the average age of financial advisors is a shade under 49 years, and about 14% of its workforce are north of 60 years. More important, less than 25% of all advisors are ages 40 and younger. And one final number to consider: Just 5.6% of advisors are ages 30 or younger. The industry needs new blood to replenish itself at a time when aging baby boomer clients will be putting greater demands on their advisors (many of whom themselves will be shifting into retirement mode). But an influx of reinforcements doesn’t seem to be happening. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

55 55 Older Advisors Driving Young Out Of The Business Among young, "next gen" advisors, the quit rate is increasing "by orders of magnitude,” It is estimated that the rate at which younger people are leaving the business is about 25%, and more than half of these young professionals are looking to transfer into another line of work. The upshot is that many older advisors will have no one to transfer their businesses to and will instead be forced to let them die: about 12,000 to 16,000 of the 315,000 advisors and brokers currently working will retire every year for the next decade. Do the math: the advisory business will need 237,000 new advisors in the next ten years to maintain its current number. Currently, only 21% of existing advisors are under 40 years old and only 5% are under 30. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

56 56 Organic and Inorganic Human Capital Many business owners, across industries, spend considerable time and energy thinking about the right mix of support, generalists, and experts. Building a team of experts can be expensive in terms of time and money. Retaining and identifying replacements can seem next to impossible. Larger investment advisory firms have had success with specialization: - Exit Strategy and Insurance - Retirement - Financial and Estate Planning - Investment Management This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice. Can-Be-Used-for-Succession-Planning

57 57 Practice vs. Firm No one size fits all. As a practice, addressing human capital needs is critical. A firm is more likely to have created an organic succession plan and can be staffed by multiple advisors. A sad anecdote: bringing my spouse out of retirement. Key difference: owner dependency. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

58 58 No Standard Firm Partner Senior Adviser Financial planner Senior Analyst Analyst Tibergien, Mark C., and Owen Dahl. “How To Value, Buy, Or Sell A Financial Advisory Practice”. Princeton, New Jersey: Bloomberg Press, This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

59 59 Advisors: Don’t Run Your Business Like an ATM A large majority of independent advisory firms will see their business value stagnate just as they near the point they want to exit the business, says the Alliance for RIAs (aRIA), a confederation of six RIA firms that brands itself an advisor think tank and offers business growth consulting. aRIA warns that most advisors fall into the “annuity trap” of treating their business primarily as a source of current income rather than building “real enterprise value.” Building value in a business requires addressing long-term structural issues, but “advisors are usually not emotionally or philosophically willing to address business structure issues proactively,” say the aRIA advisors. To avoid the long-term structural problems of a neglected business, hazards including fee compression, erosion of margins, recruitment challenges, low market valuation and limited liquidity, aRIA advisors say advisors must build scale and see their firm as surviving its owner’s exit from the business. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

60 60 Succession Plan Options 1.Sell to a financial institution 2. Sell to a like-minded advisor or peer 3. Internal succession 4.Partner with a succession firm 5.Take a hybrid role 6. Turn out the lights 7. Death/disability dissolve practice Factors that vary with each option: Legacy, Control, Financing Blend, Retention, Valuation This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

61 61 Implementing a Succession Plan The Case for Succession Planning “What's money? A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do.“ -Bob Dylan This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

62 62 Pre-planning Considerations Consider the impact of succession on your family and clients: What strategy will best serve them and how will they react to a change in practice structure. This is critical because clients consider the financial advisor and owner as the source of intellectual capital, investment guidance, and peace of mind. Full time vs. Part time Internal vs. External Succession Valuation What is driving your evaluation process: legacy vs. lifestyle vs. money? This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

63 63 Objective Due Diligence: Self-Assessment What do your clients value? - wealth management approach - investment performance - overall level of service - raconteur - emotional support How did you acquire your clients? How did you build your financial services business? What is the break down of revenue sources? Did the clients choose you or your firm? This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

64 64 What is the buyer’s motivation for wanting to acquire my business? Are you just another transaction? What is the buyer’s capacity and infrastructure? Why is the acquiring/partnership firm selecting you? The importance of legacy. What latitude and control options are being offered to you? How will the succession firm substantiate your legacy or your clients, family, friends, and the community at large? Will the sale or merger help me solve my internal management and client succession plan or does it deflect the problem onto someone else? Due Diligence: Culture & Philosophy This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

65 65 Sage “I may walk slowly, but I never walk backwards.” – Abraham Lincoln [ ] This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

66 66 Plan the Transition Get advice and perspective from mentors, friends, and industry resources. Consider handing the practice over in several stages. Engage a partner firm with knowledge and experience you trust. Develop a human capital plan. Streamline operations, technology, and infrastructure. Structure the Transaction. Establish a timeline. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

67 67 Begin the Transition Make a final decision on successor and partnership firm. Define implementation steps for operations, products, and human capital. Finalize a comprehensive plan for how the transition will be communicated to clients, employees, stakeholders, and business partners. “Success depends upon previous preparation, and without such preparation there is sure to be failure.” -Confucius [550 BC- 479 BC] This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

68 68 Client Perception Firm Structure Background & Reputation Technical Competency Identity & Vision Culture & Philosophy “Buyers all say 1.5x 2x or some multiple. They just want to concentrate on the numbers. Buyers focus on the cost. Sellers focus on the price. No one is focused on the client. How will the clients transition?” Blue Ocean National Survey This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

69 69 Implementation Challenges Client – Lack of trust in the new entity will inhibit retention. Without proper due diligence by the transitioning advisor, clients may end up in the wrong hands. Advisor – Low retention will deteriorate purchase price and negatively impact enterprise value. Successor – Without acute awareness, organization will fall short of ROI. Remember: [S x E] T = R [Strategy x Execution] Trust = Results. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

70 70 What was the most difficult aspect of acquiring an existing practice? This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

71 71 Introduction to Clients Meetings should be conducted similarly to how they have always been conducted with each client. Document notes and review with successor. Three meeting plan: 1. Transitioning advisor informs clients and manages expectations. 2. Introduce successor to client with transitioning advisors leading the meeting. Offer ACAT paperwork if client is agreeable and comfortable with the transition. 3. Successor leads meeting with transitioning advisor present. Obtain consent and sign paperwork. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

72 72 Innovative Solutions Dividing the practice. Difficult to find one “ideal” buyer. Clients can be divided in groups by type or geography, allowing an advisor to be more opportunistic in planning an exit or succession partnership. Partnership vs. Selling. What do you like vs. What are you good at? Retiring to an ambassador role may fit your personality and goals. Control and Flexibility. What would be the perfect situation for you? This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

73 73 Education & Resources Blue Ocean Global Wealth blueoceanglobalwealth.com Private Client Services Pershing Advisor Solutions New Planner Recruiting RIA Match Industry Associations –CFP Board –CFA Institute –FPA –SFSP –NAPFA –RMA Risk Management Association –SIA Securities Industry Association This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

74 74 Conclusions A lack of succession planning is an industry wide phenomenon. Current solutions are not addressing this challenge. Begin the process early. Solving the succession plan quandary will make advisors more valuable to their clients by addressing who will give the same advice and support to these clients in the event that their long-trusted advisor passes suddenly. This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.

75 75 Questions and Follow-up Sameer S. Somal, CFA, CFP ® Chief Financial Officer Scarlett Y. Che Associate, Institutional Education Group Marguerita M. Cheng, CFP® Chief Executive Officer Cecilia X. Zhong Associate, Institutional Education Group This presentation is for educational purposes only. Under no circumstances should the information provided herein be relied upon as investment advice.


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