Susan Michel has always taught her four kids a consistent lesson: You get what you earn. When Rob, her youngest, was in high school, he was swooning over a girl, but he didn’t have the cash to pay for a date. In support of young love, Susan and her husband, John, paid Rob $20 to paint the yellow shed in the backyard. That wasn’t enough for a movie, so Rob took the young lady to Taco Bell.
Susan, 58, has approached succession planning at her financial advisory business, Glen Eagle, with the same philosophy. The kids have watched her grow the Princeton, N.J., firm from a kitchen-table operation into a regional stalwart with $400 million in client assets under advisement. Now, as Susan considers retiring in 10 years or so, she’s empowering them to earn the right to take over, in a process designed to steer control to someone with a passion for the business.
Succession planning in family-controlled entities can turn into a grim sideshow. A lack of clear guidance often leaves a feuding family and an embarrassing legacy: It’s one reason only 30% of family businesses survive to a second generation, says Mary Ann Sisco, a senior vice president at Northern Trust.
Succession plans are particularly rare among financial advisers—even though that’s like a doctor avoiding physicals or an estate lawyer not having a will. Fewer than 40% of firms have a succession plan, according to consultancy the Aite Group. That’s less surprising, however, when you consider that advisory practices often start out lean and informal—sometimes as little more than one person with a phone and a desk.
That was the case for Susan Michel. She started her career as an educator, teaching at military bases where John was deployed. In 1988, after John transitioned to civilian life, Susan began training as an adviser. At first her work mostly involved meeting female friends and acquaintances at her house to discuss their plans. But by 2002 she had a big enough client book to justify hiring staff. Today she runs three offices in the Northeast, with 12 advisers on her team. The kids have always been involved: In the meet-at-home days, they helped tidy up and shred papers, and in 2004, Susan recalls, Rob and his sister, Carol Ann, 12 and 14 at the time, encouraged her to sign a lease on a bigger office.
Two years ago, Susan gave her family network a more formal role. Her three sons, daughter, and husband now form a family advisory board that meets regularly with Susan. “Engaging the kids in the business early on” is rare in the financial planning world, says John Anderson, who heads practice management solutions at the SEI Network of advisers. But that engagement is crucial to Susan’s succession plan, which will determine future ownership of Glen Eagle based in part on how much value the children bring to the firm.
Here’s how it works: Each child will receive a percentage of shares of the company, determined by Susan and passed along through revocable trusts. No one will have a majority, Susan says, and the percentages can change anytime at her discretion. If something happens to Susan and John, the council of kids will immediately become Glen Eagle’s owners and board of directors. Absent such sudden tragedy, Susan will gradually transfer ownership shares before she retires. Either way, the board’s first priorities would be to pick a CEO and then decide how much ownership the family would retain and how much the CEO would receive. And in any shareholder decisions, the weight of each child’s vote will be based on the shares they earn with sweat equity today.
Passing Along a Family Business
Tips for keeping a family-owned firm humming once you’re no longer in charge.
Give the kids a trial run.
Before members of the next generation get a say in the business, assign them projects in which they can demonstrate commitment and develop aptitude.
Don’t dawdle.
At least under current law, firms can generate big estate-tax bills if the head of the family owns a major stake when he or she dies. Transferring ownership while still alive can help avoid the blow.
Have a separate estate plan.
Owners should have a separate plan for bequeathing personal wealth. That can help the transfer of a company go more smoothly, while making sure less business-savvy kids don’t feel excluded.
While Susan’s two older sons and daughter don’t work in financial planning—they’re a marketer, lawyer, and banker, respectively—collectively the board has the securities certifications to help man- age the firm if needed. Susan won’t discuss the size of the shares she’s planning to designate to each child, but it’s Rob, now 25, who currently seems likeliest to succeed her. He splits his time between an MBA program at the Wharton School and Glen Eagle, and he’s the only child to have expressed interest in the business as a full-time gig. Right now, in his first big initiative for the company, Rob is developing a technology platform that will allow customers to see all their assets in one spot. Before it moves forward, of course, Rob must prove to the family board that it’s a sustainable endeavor.
The Michels’ arrangement isn’t without shortcomings. The plan certainly creates the possibility for intrafamily feuding over ownership and fair sharing of responsibilities, scenarios that Sisco has seen create “conflict that can drive family members apart.” And if the family hires an outsider as CEO, that could generate further tension.
Still, Susan says, the system creates the meritocracy that she seeks. It’s up to family members to earn more ownership shares by taking on more responsibility or suggesting new ideas. Susan is adamant that she wants a committed entrepreneur in charge. By formalizing her plan, she has given her kids the power to step up or step aside.
A version of this article appears in the January 1, 2017 issue of Fortune with the headline “A Legacy Worth Working for.”
