Strategic Moves
Art by Alfonso de Anda
Troy Hammond is not surprised when plan advisers reviewing merger and acquisition details sometimes change their mind about the specifics of a potential deal.
“When you start taking these whiteboard concepts and turning them into definitive documents is when it becomes real for people,” says Hammond, CEO of Pensionmark Financial Group, in Santa Barbara, California. “Many times, people look at that and go, ‘Maybe I don’t want that.’”
Hammond, who has helped oversee 52 transactions, including World Insurance Associates’ acquisition of Pensionmark this spring, sees succession planning as a fluid conversation that will ideally incorporate shifting viewpoints. Those might range from the timing of a hand-over of clients from a retiring adviser to a new adviser or, in the case of an acquisition, extending or shortening the length of time the adviser continues working under new ownership.
“For almost every single person who’s selling, it’s the only transaction they’re ever going to do in their entire life, and they get one shot at it and they have zero experience,” Hammond says. “I can really empathize with advisers; the reason they might change direction throughout the process is that they’re learning.”
Succession planning is a key topic for many retirement plan advisers, particularly when principals are late career. And a smooth transition, especially when it involves the sale of a company, can be a natural outgrowth of matching philosophies with an acquirer, agreeing on mutual goals and even potentially aligning interests longer term through shared revenue agreements crafted in a deal.
When it comes to evaluating a possible purchase, the first step in developing a succession plan for Jed Finn, chief operating officer of Morgan Stanley Wealth Management, is ensuring the parties’ objectives and cultures fit. He points to the acquisitions of Cook Street Consulting, for $72 billion, in March and Hyas Group, for $43 billion, in September 2021.
“It’s important that the strategic vision is the same. We won’t even continue the conversation if there isn’t that recognition that we want to be able to bring the entire set of advice capabilities to the client,” says Finn, who works out of New York City and also heads wealth management corporate and institutional solutions for the firm. “If someone is joining us and isn’t interested in bringing wealth management or financial wellness, that’s not a good fit for us—so you ought to be clear about what you’re solving for.”
Planning Outside of M&A
Succession planning also extends beyond mergers and acquisitions for Tom Simonson, managing director of the retirement solutions group at Creative Planning in Charlotte, North Carolina. He, too, determines the success of M&A more as finding a good cultural fit than in defining contract terms.
“I don’t think there’s a one-size-fits-all solution to succession planning,” Simonson says. “And certainly, we’ve seen an increase in M&A activity … for those firms that are looking for that as their succession plan.”
Depending on the circumstances, other options Simonson sees working effectively include hiring from the outside or transitioning leadership of the firm to other team members. But, regardless of the specifics of the change, Simonson encourages creating what he describes as a thoughtful transition plan. In most cases, he has seen that a 12-to-18-month period works best, but it depends on the familiarity of the person taking over the client relationships. One of the top considerations for Simonson is: Was that individual new to the clients or moving up from a supporting role?
Establishing a team approach ahead of a change in leadership can also help build new relationships and introduce change before any formal hand over.
“There’s no doubt, if you have multiple professionals involved with [the] client relationships, that gives you more options when you start thinking about what does the transition plan look like?” Simonson says.
Communicating well in advance of any changes is also an essential part of a well-thought-out transition. Simonson notes that a team member’s retirement is often anticipated, but bringing in potential replacement team members ahead of time builds trust and comfort.
In Hammond’s experience, keeping the principal engaged with the business for five years or more after the sale can be beneficial. “The longer time horizons allow us, in our centralized support model, to have an impact on the business and help it grow faster,” he says. “It allows the selling party to benefit from that growth, and everybody ends up better off, the longer that time horizon goes.”
For those longer time horizons, deal terms that include revenue sharing vs. a traditional equity or asset-based transaction often help support a joint partnership by aligning interests, Hammond says. “It’s hard if you do a traditional acquisition and the adviser becomes an employee, and their upside is limited,” Hammond says. “It’s hard for that adviser, in my opinion, to think ahead 15 years, or 10 years, because they’re like, ‘I have a three-year earn-out, and then after that you guys pretty much get all the upsides.’”
Jeremy France, head of Graystone and Institutional Consulting with Morgan Stanley Wealth Management, also sees the advantages of a transition managed over a five-year period, but he emphasizes the need to be flexible with timing, depending on advisers’ preferences.
“We have some who come and say they want to work with their clients to transition after a three-year period and then do something larger with Morgan Stanley, and others purely want to retire,” says France, who is based in New York City. “That’s one thing our channel allows for—that complete flexibility in that decision, where they can be a part of the future success or sit back and watch the growth.”
Finding the Next Generation
Looking further ahead, a potentially much more difficult succession problem to solve lies in the need to cultivate the next generation of advisers. “As an industry, we have a major problem, which is we have almost two advisers retiring for every one coming into the business,” Hammond says. “So we have this interesting dilemma of: Assets are growing—except for this year—and we’re being asked to provide more service to our clients, but there are fewer of us to do it.”
“So we have this interesting dilemma of: Assets are growing—except for this year—and we’re being asked to provide more service to our clients, but there are fewer of us to do it.”
Hammond also sees the need to find new avenues for training junior staff, as prior methods, such as getting a start at a wirehouse, are becoming less common. Pensionmark relies on an internship-to-hire program that it began over 30 years ago—most of its executive team got its start there, including Hammond.
For Simonson, too, creating new training approaches is essential to developing a new generation of advisers. Over the years, he has seen adviser firms recruit from recordkeepers and administrators, which traditionally provided strong training, including in technology. But an unintended consequence of fee compression and more widespread adoption of technology has meant less hiring and training and development of young professionals by those recordkeepers and administrators, he says.
“We can do a better job as an industry as a whole and create an environment they want to enter into and stay engaged with over time,” Simonson says. “It’s tricky because it’s a highly technical industry and not something you learn in college—it’s a learned skill.”