What I learned from four failed attempts to find a successor for my $1.5-billion AUA RIA

Brooke’s Note: Dennis Gibb is old-school. He knows it, and you’ll know it when you read this article. What’s fresh and new here is his expose of his own tough experiences in trying to pass on his business to a successor — including one stretch where he was simultaneously battling cancer. He’s intimated to me that at 66 he is likely to call off retirement and may, in fact, find new ways to build his business. See: Two senior UBS brokers pass on retirement to pursue aggressive breakaway plan. He says: “I do 3.5 hours of aerobics per week, cross-country ski, hike and fly-fish. My maternal grandmother lived to 105, and my mother is 96 and voluntarily gave up driving last year. I expect to be here for a while.” Dennis previously wrote this article: One RIA in Seattle confronts Occupy Wall Street and writes a tough-love letter

I am a dinosaur in this business. I started in 1973 and I built my business by pounding the phones 100 times per day for years, learning the business as I went along. My practice in those early days was just that I was practicing on people’s trust and money so I could learn my trade.

Almost 40 years later I truly have a practice where my firm and I contribute to the betterment of a series of very loyal clients, We have $400 million of high-net-worth assets and we advise $1.1 billion of Native American assets. We have 35 tribal clients and 75 client relationships with 125 to 135 accounts.

Uninvited reptile

But there is a snake in the garden.

When I turned 60 (I’m 66) I began to think seriously about the transition of my firm. I had given it some thought before and actually given the thoughts some actions but turning 60 was the beginning of really serious focus. See: UBS brokers break away Mississippi style and a bass-fishing ex-Merrill broker comes out of retirement.

When I started my current firm I decided not to name it after myself so it would be easier to transition to a new owner. As I began to study the dynamics of my business I realized that it would have to be a different sort of action. The firm’s business is made up of consulting work for Native American organizations and high-net-worth individuals. The Native American business was most identified with me personally, as opposed to the firm, and was likely not to have any value to a new owner. So the trick was to find a person or person who could continue our standard of care with individuals.

I have made four attempts to find a successor. The first, in 1995, was a friend with an engineering background who was trading his own and his family’s money. It didn’t work; he did not want to do the hard work that comes with financial advisory, he conceived of himself sitting in front of a screen trading all day, so it was a mismatch of needs and wants. See: Have an aversion to succession plans? Consider a continuity pact as a vital baby step.

The second, in 2000, was woman in her late 40s who was a CFP and wanted to complement my clients by adding a financial planning component to our palette. We negotiated for some time about the terms of an arrangement and at the last minute she decided to get married and run her own financial planning practice from her home. Neither the marriage nor the practice survived.

Crumbling partnership, marriage, markets

The third, an effort that spanned 2006-09, was the biggest disaster. This was a man I had known for 25 years and worked with at the now-defunct Bear Stearns. He was a highly successful fixed-income sales trader who had retired but then realized he was bored without the stimulus of the markets. He did not want to go back to the sell-side and contacted me about joining the firm to develop a fixed-income management product.

At the time I was in contact with some very large fixed-income investors in the form of my Native American clients who needed help. I was blinded by confirmation bias — I saw what I wanted to see and heard what I wanted to hear and I rejected or ran over anything that differed. He joined the firm and the Native American bond business did not develop because of the conflict between me acting as their investment consultant and the firm also being an asset manager.

When the fixed-income idea did not work, I realized that he had no desire or capacity to develop a business. He just sat there looking at his Bloomberg screens all day. His uncertain and expensive private life also became an issue. All of these things I should have seen but for my confirmation bias. Things got a lot worse in 2008 when he lost all of his personal money by being invested in Freddie Mac and Fannie Mae preferred and being unwilling to sell despite constant pleadings from me.

In the end, I had to fire him, and an employment contract that we jointly modified and signed without lawyer review led him to litigate me. I should point out that this came right after I had finished treatment for bladder cancer, watching my 33 year marriage dissolve and that little problem in the financial markets in 2008.

Last-minute jitters

When all the dust settled, the litigation cost me about $100,000, which I considered a victory given what his initial demand was. I had fronted him a lot of salary for 24 months, and had a very expensive Bloomberg contract that had two more years to run.

I took a break from this self-flagellation until the middle of 2012 when I was approached by a woman I had known for many years; in fact she had once worked for me. She had gone on to be a successful representative at a major wirehouse but was tired of the compliance restrictions and the lack of freedom to practice her business.

For six months, we talked and discussed the nature of my firm, her business, her reasons for wanting to go independent, what our joint expectations were. We met with an organizational psychologist to see if we were compatible.

After all that we actually set a target date for the transition and began to work with our custodians about how to transfer the assets with the least trouble. I canceled all personal and professional travel for the first quarter of 2013 to work full time on the transition.

As the weeks passed, problems developed: Some assets might not transfer; she would not get mutual fund trail commissions, so those share classes would need to be changed; she had a retention note and her pay would be interrupted for a short period during the transition and so on. All of these are normal in this type of movement, and I thought I had given her assurance that the pay and note issues would be covered by the firm.

Finally, in the first week of February she freaked out and laid out a whole raft of false trails about why this was not right. They were all false as they were cover for the real issue: that she could not find it in herself to take any risk or to place any faith in either me or the future. She lost sight of the forest for the trees. While the breakup was not financially costly, it was costly in that most irreplaceable commodity — time and it was devastating for me psychologically, to be so close, want it so badly, to see the benefits for her and then to lose it.

Lessons learned

These days, I am rethinking the whole strategy at this point and not actively seeking a successor — I may go the toe-tag route. So what have I learned from this that might be useful to myself and others?

1. To be controversial, women have a more difficult time with entrepreneurial decisions than men
While ego is part of all humans, big ego is distributed more to males and nurturing to females. In the end, the decision to go out in your own direction is based in an ego that says that you will do this or die trying. In many cases women get to the precipice of the decision that will introduce uncertainty and risk to their lives and they opt to be less bold. See: Eavesdropping on the Women Advisors Forum: Rainmakers share their secrets. Hint: They revolve around finding a niche.

2. Financial advisors at major wirehouses are no longer as entrepreneurial as the past
For many of those of my vintage, the investment industry was one of only a few choices of occupations. It was a classic forced entrepreneurial situation (although most of us couldn’t spell the word). We had nothing except a desire to make a living and a place to sit from which to build a business.

Yes, the firms helped with their support and advertising but they also got the lion’s share of our commissions. Sometime in the mid- 1990’s there seemed to be a change, and wirehouse reps started to move from being investment experts to becoming more client- facing with strong incentives to turn money raised over to experts and spend their time cultivating clients. This trend accelerated after the bull market ended in 2000. Today, many reps have inherited a good portion of their book, and since they did not develop it by their own personal efforts have less of an equity feeling about it. Many of their assets are encumbered by various wirehouse programs designed to insure the assets at least remain in-house.

The result has been that many wirehouse reps are not willing to give up the certainty of a large firm for the daily battle for survival of the independent; more are unwilling or unable to give up the compensation arrangements. This was the problem with my second and fourth attempts.

3. The more impressive the current business owner is, the more difficult it is to find a successor
I will not be arrogant and say that I am so special that no one can replace me, but in all of our cases we have found ways to do things that work for us, and they might not, if fact will not, work for others. The more unique the skill set, traits, intellectual capacity and ethical value system, the more difficult the transition will be just because fewer people will feel they can succeed. See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper.

4. There are few good options for those of us who built these firms
You can sell to a conglomerator, but to get a good value you need to have commodity-type accounts. You can bring someone in to succeed and buy you out over time, but valuations are an issue, as is the fact that the departing person is essentially getting paid with the fee they developed, so there is little new money in the firm. You can attempt to sell off individual relationships over time, which seems sort of cheap, or you can run it until you leave with a toe tag and just make as good a living as possible and leave the big payday out of your plans. Most independent businesses do not survive the first generation of owners; why should our businesses be different? See: Favorite succession plan of RIAs remains the same: none at all.

5. Regardless of how qualified the person(s) are that you are thinking of bringing in as successors, and how eager you are to realize the value of the firm, the most dangerous thing is confirmation bias
If you don’t think you can avoid it, find a dispassionate third party to work the deal. This is a very tricky thing, filled with people of high self-esteem and ego, and the chances of something blowing up are higher than those of success.

Final Note: Dennis Gibb says that he is one test away from being considered clear of cancer. Here is an interview I did with him for InvestmentNews in 2006.

During his 37-year investment career, Dennis Gibb has held senior positions at DuPont, Walston, Dean Witter, Morgan Stanley and Bear Stearns. In 1989, he founded Sweetwater Investments Inc. of Redmond, Wash., which currently advises in excess of $1 billion in client assets.