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Give Away Your Financial Firm?

Give Away Your Financial Firm?

by Bill High

We are living in a time of upheaval. One sector experiencing that upheaval is financial planning and investment firms as experienced owners and executives look to exit.

An InvestmentNews article, “RIAs May Be Heading for a ‘Succession Planning Crisis,’” details the problem. A study by DeVoe & Company of Registered Investment Adviser firms found that 57% of the respondents believed a transition from founders to successors would be “bumpy or worse.” An additional 13% said it would be significant or severe.

The study identified a big part of the problem is firms not investing enough to prepare the next generation of leadership.

Here’s an idea for at least a partial solution. First, recognize that transition and succession will occur. Second, take incremental steps to address succession.

Stated differently, you don’t have to solve the problem all at once.

A simple solution is for founders to donate a small percentage of their shares, perhaps 5%, to a donor advised fund.

The founder can receive a significant income tax deduction as a result. Potential successors can be given the opportunity to purchase those shares out of the donor advised fund.

The founder gets to retain majority interest and control, yet it gives potential successors ownership in the firm. If for some reason the transition doesn’t work, the founder can always buy the shares back.

This incremental step is a low risk way to move towards succession while addressing tax reduction and increasing charitable giving.

What we should not do, however, is pretend that succession gets addressed by doing nothing.


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Published October 2, 2020

Topics: Family Business

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