The owner of a boutique advisory firm in California's Sonoma County is eyeing retirement 10 or so years down the line. And he's wondering about the best path to take.

For advice, we turned to our panel of experts: Philip Palaveev, president of Fusion Advisor Network, an Elmsford, N.Y.-based network of advisors; Chip Roame, managing principal of Tiburon Strategic Advisors, a Tiburon, Calif.-based market research and strategy consulting firm for financial institutions and investment managers; and Hellen Davis, president of Indaba Training Specialists, a management consulting and training firm in Treasure Island, Fla.

The Situation:

About five years ago, when last we met Thomas Joyce, he and his wife, Judy, were running a small advisory practice from their home on 11 ½ acres in Sebastopol, Calif. At that point, they were considering hiring an assistant to take over client services, data gathering and a host of other duties. After reading about their situation in these pages, Linda Goff, an interested candidate called them up — and they hired her. She's still working for them.

But now, Thomas, who is known as Tif, is wrestling with another problem. He's 57 years old and starting to think about retirement. (Judy is now working part-time in the practice.) What's the best way to hand off his firm, Joyce Financial Management, which has about $80 million in assets, he wonders. Should he bring in a younger associate, merge with another practice, or sell to a bigger outfit?

Way back when, Tif and Judy had their sights set on being musicians, not financial advisors. After graduating from college, where he studied music composition, Tif started a cabinet making business, which he ran with his brother. Judy, disillusioned without school, went to work for a printing business. When they decided to get married, they sought out a financial advisor for guidance, but they didn't have enough money to attract any interest.

Eventually, Tif got to thinking about doing something else. Thanks to his unfortunate experience seeking financial advice, combined with difficulties running his cabinet making business, he decided to get his CFP designation and became a bank investment rep. Not long after, Judy got her Series 7, left the print shop and joined him. In 2000, they decided to go out on their own and, about six years later, hired a full-time administrative assistant.

Now, Tif is thinking about succession. He figures he'll retire in 10 or so years, although he could continue to work part-time. While that seems like a long time away, he fears he'll need all that time to do it right. Plus, he has another concern, quite apart from retirement. He figures he's at an age when he has to consider who could take over should something happen to him. “As people get older they have a fiduciary duty to think about this,” he says. It's advice he would give a client in the same position — preparing for what he calls the “lifeboat drill.”

To that end, he recently hired a coach to help him out. First step was a survey of the 100 households in Joyce's book, to evaluate their satisfaction level and pinpoint areas for improvement. According to Joyce, results were resoundingly positive.

In the meantime, he's started to do his own research. For example, he's talked to local advisors affiliated with LPL Financial, which is his broker/dealer, as well as other advisors and accountants he's formed relationships with, feeling them out for whether they'd like to strike a deal of some sort. That's included the possibility of taking over his book should something happen to him, but not necessarily as part of a formal succession plan. He's also interviewed a few potential junior advisors, finding some names through wholesalers he works with.

Plus, he's taken some steps he figures could make his practice more appealing. First, he moved his offices from his home — “a mile down a gravel road in the middle of nowhere” — to nearby Santa Rosa. “I'm more a part of the real world, where stuff is going on,” he says. And, he's starting a push to grow his book. For the past five years or so, he says he hasn't tried to gather new clients. Now, he's thinking about developing a more systematic approach to how he asks his centers of influence for referrals.

Another plus: Revenues are evenly divided among clients — no 80-20 rule at his practice. Generally, clients are near or post-retirement age, with an average account size of $800,000.

The Advice:

Philip Palaveev

There are a lot of advisors in this position — wondering how to go about their succession planning. He's about 10 years from retirement and it takes a lot of time to prepare for succession.

Anyone planning to retire in the next five years should be working diligently toward a succession goal. But 10 years may be a little long from now to get started, unless there are very specific plans and circumstances. A lot can change. And many of those changes may not be under the control of the advisor.

Don't get me wrong. It's very important to start early. But the biggest priority for him should be growth — how to grow and build a successful practice — rather than how to exit. Any advisor who has created a profitable and successful practice will find it relatively easy to capitalize on that practice. The things he needs to do to create a succession plan are the same things he needs to do to create a more profitable firm. That includes evaluating his strategy, determining what makes him unique and how to capitalize on that differentiation. He's grown a good-size business. He just needs to think about what makes him stand out.

If he's considering adding a junior partner, that has practice management implications as well as succession implications. A junior advisor can help him create more capacity and better service, plus eventually helping him solve his succession problem. But it's a big decision. I would not hire somebody just so they could be my successor 10 years down the road. They have to play a bigger role in the firm, because 10 years is a long time to expect someone to wait.

And hiring a junior advisor with succession in mind also is very risky. It's like putting all your chips on one number. You're really betting on a single individual being the one. It may turn out that the person isn't interested in becoming the successor or has different life goals. You don't know what will happen.

If he chooses not to work with a junior advisor, then, when the time comes, he certainly will be able to find a buyer. If you build a successful practice, you will find someone interested in your firm. A good b/d can help. LPL has thousands of advisors. One of them must have an interest in his firm and be a good fit.

Networking with other advisors to create a back up plan also can't hurt. We suggest to all of our advisors to create buy-sell agreements with another peer. It's to establish protections against unforeseen circumstances.

As for the age of his clients, practices with younger clients tend to get a higher valuation than those with older clients. Still, firms with accounts that are of retirement age are valuable. That's not an area for concern.

You have to think of this as though you were selling a house. If you're living in it for 10 more years, I wouldn't start remodeling to please the buyer. I would start remodeling so I could live and thrive in it for the next 10 years. A well-maintained house in a good neighborhood usually will sell for a good price.

Chip Roame

I think he needs to understand the basic considerations of succession planning. You have a few choices, but what's important is how they differ according to the amount of control you have vs. how much money you get.

One choice is to bring in an employee whom you train to do things your way. And you have a lot of control. You also can retain some of the ownership for a long time and let the person slowly buy in. The employee probably won't have much money and will purchase a small share of your business, usually underpaying for that share. So, you get less money, but more control.

Another is a merger. You find a firm of a similar size, probably locally. But that person will have more control. For example, if he or she uses another b/d, your clients will be moved to that b/d. But the buyer will pay more, maybe providing a down payment. So you have a medium amount of control and a medium amount of money.

The last option is to sell to a bigger company — a CPA firm, a bank, one of those roll-up guys. You're probably going to get the most money. The buyer will be able to just jump in and run your business. But you're going to have to stick around for a few years — and you lose all control. You now are an employee. You're now reporting to someone. They might change the name of the business, service levels, and you have no say in it. There's less control and the most money.

So, you have to decide how important is the amount of control you have compared to how much money you make. It all depends on your tastes and circumstances.

In terms of what will attract a buyer, I think that having the full-time administrator will be very helpful. It's even more critical than having another advisor at this stage. If he exits, then continuity becomes a problem. While the administrator may not be qualified to be an advisor, she could go with the sale and clients would know her. She would provide a sense of stability. That's a savvy move.

As for growing his book, I'm not sure that's necessary. No one's going to buy you because you grew from $80 million in assets to $120 million. They want to know the $80 million is solid and that some employees will stick around. Also, it's great to have clients who are enthusiastic. But you have to be careful that it doesn't mean they'll no longer be there if you sell. It actually could be a downside. I'd like to see the client survey show whether they're satisfied with the assistant — more than just in love with me personally.

Hellen Davis

He's got the classic problem everyone in financial services has.

I think he'll find that bringing in a junior advisor is more difficult than he may realize. To get a junior advisor with some experience who's going to be competent, he'll have to pay the person a lot of money. And these one-man bands don't make that kind of money. To get someone with a financial background, you need to pay $80,000 to $100,000. Also, he may have built up enough business for himself. But there may not be enough for someone else.

What he's got to do is get a junior person straight out of school, someone not yet proven. But, someone like that doesn't even know what the business is like and they're not looking for a 50-year career. So they may not want to take over the business.

Also, especially if he brings in a junior advisor, he's going to have to grow the business. He'll have no choice. He'll have to address the income that will have to go to compensate the new person.

If he tries to sell, he'll have a hard time. His practice is all about his personal relationships with his clients. Being solo can make it very hard to sell a business.

My suggestion is to merge with another guy who is in his late 30s or early 40s, a solo junior practitioner, someone seven to 10 years in the business. That's the type of guy to merge with. They'd start doing joint work together, cross pollinating their business. He'd begin with a 30-70 split of new business. Then as demand progresses, they'd move to a 50-50 split. As he gets close to retirement, it would be 70-30. And he should have a buy-sell agreement in place, with a clause addressing what happens if the junior person wants to buy him out sooner and something about disability.