Commonwealth Independent Advisor

What’s the Problem with Succession Planning for Financial Advisors?

Posted by Bette Skandalis

March 2, 2016 at 1:30 PM

succession planning for financial advisorsJust as some clients ignore the financial risk that comes from neglecting their asset protection and retirement planning needs, some advisors ignore the risk exposure created by the absence of a written continuity or succession plan. This leads me to wonder, “What’s the problem with succession planning for financial advisors?”

To help answer this question, here I’ll explore what’s happening in the industry as a whole, the reasons many advisors resist planning, and your options when it comes to putting a succession plan in place.

An Aging Profession

You may have read in the financial press that many advisors are reaching retirement age, and there are few waiting in the wings to take their place.

  • InvestmentNews cites recent research suggesting there are more than $2.3 trillion in assets that are managed by advisors 60 and older. Of those advisors, 70 percent are solo practitioners, and less than 25 percent have a succession plan in place.
  • According to Financial Advisor, in the next 10 years, 12,000 to 16,000 advisors will retire each year. Despite these anticipated retirements, only 29 percent currently have a succession plan.
  • In its study of elite advisors, the Oechsli Institute reports that more than 40 percent of advisors are older than 50, 75 percent are older than 40, and only 5 percent are younger than 30.

Even if these statistics don’t have you concerned, your clients may be getting worried—and increasingly aware. Popular print and broadcast media swarm with stories aimed at advisors’ affluent clientele, like the New York Times article “What to Do When Your Financial Adviser Retires.” It suggests that a hastily conceived exit plan does not serve client needs, contributes to decreased retention, and results in the devaluation of an advisor’s business.

What’s happening at Commonwealth? Recently, the prevalence of continuity and succession planning has trended upward here at Commonwealth—reflecting the demographics of our advisors, as well as their increased awareness of the issue. As of year-end 2014, the number of our advisors who have completed a continuity or succession plan is at least better than the industry average. Still, we know that a majority have yet to put a plan in place. What are the reasons behind this resistance?

Reasons for Resistance

As someone who has dedicated yourself to protecting your clients’ financial futures, have you resisted putting together a formal succession plan to help you exit the business or a continuity plan to address the unfortunate event of death or disability? If so, you may find your reasons are likely related to your current circumstances or how you identify with your business.

Here are some common circumstances that may delay planning:

  • You’re too busy.
  • It’s too early.
  • You can’t afford to retire.
  • You are waiting to reap the benefits from clients who will be retiring soon (401(k) rollovers, etc.).
  • It’s overwhelming, involving networking with other advisors and the daunting task of recruiting and training young advisors.
  • You don’t know anyone.
  • You’re hoping a son or daughter will enter the business.
  • Your spouse wants you to continue working.
  • You don’t know where to start.

You might find these issues surrounding self-identity also apply to you:

  • You derive tremendous satisfaction from what you do.
  • You don’t have enough hobbies to fill your time.
  • Being human, you have a difficult time acknowledging your own morbidity and mortality.
  • You resist the idea of “retirement,” favoring instead an “ongoing journey” or a “next chapter.”
  • You’re not personally invested in what happens to the practice after you’re gone.
  • You simply don’t want to retire.

A common denominator unites all of these reasons: few advisors relate to the finality of “succession” and “retirement,” favoring instead a more fluid approach to transition. Nevertheless, it’s your duty to explore all options when it comes to what happens next.

What Are Your Options?

There are a range of plan types available, depending on your preferences regarding the timing and level of involvement in the transition:

  • Sell and exit: A common plan is to value your practice, sell it to another advisor, and retire. Occasionally, some retiring advisors will stay appointed and keep their licenses for a period (e.g., three to six months) to help introduce clients to the new advisor.
  • Merge and stay: You can sell your practice—thus unburdening yourself of the costs and efforts associated with being a business owner—but stay on with the buying advisor, either to split business or as an employee.
  • Internal transition: This option has attracted a lot of interest lately, due to books like Succession Planning for Financial Advisors by David Grau Sr. Grau contends that 99 percent of practices will end with the practicing advisor’s retirement or demise, unless an effort is made to develop an entity that outlives any individual advisor, much like the structure of a law firm. This option requires a great deal of planning and dedication to the transformation from practice to business. But the reward is a lasting legacy.
  • Partial sale: If you love what you do, you may elect to keep your top clients and sell the majority of your client groups. This may be accomplished with or without the benefit of a merger. Some advisors do this in lieu of retirement, favoring instead this “lifestyle practice.”
  • Death or disability: If you’re in the “I’m never going to retire” crowd, consider putting together a plan that transfers the business only in the event of death or permanent disability.

The “Real” Problem

The real problem with succession planning is that most advisors equate it with retirement—and their exit from the business. In reality, it’s more often an exercise in risk management for you and, more important, for your clients. By creating a succession plan, you are simply insulating your practice from circumstances you wish to avoid.

I strongly encourage you to complete a continuity or succession plan. By doing so, you will model what you have been telling your clients to do for years: Hope for the best, and prepare for the worst. Plan design is flexible enough that you need not give up what you love to do—you may even choose to do only what you love to do—while ensuring maximum protection for your clients, staff, and family.

Do you have reasons for not having a succession or continuity plan? Have your clients asked what will happen to their financial plans when you retire? Please share your thoughts with us below. 

SWOT Analysis: Aligning Your Goals with the Current Environment

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Topics: Practice Management, Succession

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