What is the difference between a financial service firm and a family owned business?

When it comes to legacy, culture, and success and failure rates, I would say not much.

In the most recent study by IN Advisor Solutions on succession planning, “77% of advisors who have executed a succession plan say the most important factor was to continue the firm’s legacy and reputation,” yet over 50% of the advisors in the study do not even have a written plan. So, what does that say about the need to continue the legacy and culture of the firm that an advisor has spent their life’s work building up?

Before we look for an answer to that question, let’s set a foundation about family owned businesses and the pitfalls associated with them. As reference, of the 18 million enterprises in the United States, more than 80% are family dominated.[1] Why is it that so many family businesses fail to pass on to the next generation? Well, according to the Family Business Institute “only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.” We need to examine what causes these failures and how the financial service industry and advisors can learn from the past mistakes of other business people before them.

What is startling about that statistic above is that 70% of those family businesses do not continue into the second generation, and I do not think the financial service industry is immune to that pattern. Traditional thinking would point to two reasons for a high failure rate:

1. Federal estate taxes
2. Poor management decisions by owners

But a study in Australia where there is no estate tax showed similar failure rates to that of the United States.[2] I might conclude that decision making in business and succession planning are the two areas that need improvement by today’s advisors. Whether or not their successor will be a family member does not improve their success of continuing the legacy and culture they have built over the years without proper and timely planning.

We must get at the root cause of a firm’s issues to improve their chances of success, and that is exactly what Cambridge and Continuity Partners Group have tried to do with our succession solutions focus over the last few years. Some of the factors we have seen are:

• Deteriorating family or partner relationships
• Lack of competence or untrained and unprepared for succession
• Tax and estate planning
• Other various issues (economic, competition, demographics)

In our approach to practice management with our advisors, Cambridge and Continuity Partners Group have worked to better inform our advisors without a plan to realize the need today to develop a death, disability, and ultimately a retirement plan for themselves and their business. Most advisors I have worked with over the last 15 years seem to put more emphasis and work “IN” the business today than “ON” the business for a future benefit. I say there must be a balance in a rep-advisor’s decision making process that takes into consideration where the business is today and where it wants to go in the future. We know that each rep-advisor’s business is unique and evolving and so too are their succession plan’s, like a will for a client updated when material changes happen.

I recently attended a meeting in Florida that was held by one of our offices at Cambridge for their advisors. During my presentation on succession planning I asked the group, “As financial advisors helping to plan, invest, and achieve your clients’ goals, how can you leave your most valuable asset, your financial services firm, unprotected and without a plan? If zero times zero is zero, wouldn’t it be better to develop a plan to get some remuneration for your business, but more importantly, why would you leave any money on the table?” I think each advisor at that meeting, and those affiliated with Cambridge without a succession plan, must answer that question for themselves in order to begin the planning process.

We look forward to hearing and discussing your thoughts and concerns on an issue that we see as the most important one our industry will face in the coming years as the average age of financial advisors across Cambridge, and the entire independent broker-dealer channel, continues to rise.

My hope is that all the Cambridge rep-advisors reading this blog without any type of continuity or succession plan take a pause out of their busy schedules to contemplate what is right for their business, their family, and their heirs, and work with us to better prepare them and their businesses to succeed, not just into the next generation, but into the one after that and the one after that. No matter how slow you put your plan together, its way faster than sitting in the office not doing one.

Statistics are only that—statistics—so let’s remember that…You Control the Journey!

~Jeff