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Three Key Aspects of Succession Planning for Financial Advisors

Financial advisors make a living helping their clients prepare for the future. So why aren’t they more proactive about their succession planning within their own firms?

Imagine this: You sit down with a prospective client in his late 50s who wants to retire in the next 10 to 15 years. He casually mentions that he has no retirement plan in place. “Never even thought about it,” he says. If you’re like most advisors, you’d probably struggle to keep the shock off your face. And then you’d roll up your sleeves and get to work.

Yet many advisors are in a similar situation in that they don’t have a clear succession plan for their firm. According to one recent survey, only 27 percent of financial advisors have a formal, documented plan in place. Among smaller firms — those with less than $50 million under management — the numbers are even worse: Only 13 percent have a plan for succession.1

This approach would be troubling under any circumstance, but many advisors are in an older demographic. There are more certified financial planners over 70 than those under 30.2 More than a third plan to leave their firm over the next 10 years, and more than $2.3 trillion in client assets are currently being handled by advisors aged 60 or older.3

Seeing these numbers is like finding out that a thoracic surgeon is a pack-a-day smoker, or that a lawyer has no will. It’s unnecessarily risky among a group of people who probably should know better.

Three Priorities to Think About

There’s no doubt that succession planning can be daunting process. To simplify it a bit, break it into three main aspects: you, your employee and your clients.

Succession-planning for you.

The main reason many advisors don’t have a succession plan in place is because they’re unclear about their own retirement. Of the advisors who do have a succession plan, most spend more time setting valuation targets for the process than detailing the transition.1 For example, once the firm gets to $25 million in assets under management, the owner thinks it’ll be time to step down. That’s not a bad start, but it’s only that — a start. Advisors still need to do the hard work of figuring out their own retirement, meaning whether they have the resources to meet their financial needs for the long haul. They even need to consider less-quantitative things, like what their ideal retirement looks like, where they want to live, and how they want to spend their time. Only 11 percent of advisors say they are “absolutely clear” about their own retirement. (Another 29 percent are “somewhat clear.”)1

Succession planning for your employees.

Next, advisors need to think in terms of handing over control of the business. For a family-owned firm, this process can be fraught in that it requires honest conversations about the interest level among people in the next generation. Some people may not want to run the firm, others may want to but may not be qualified, and still others may not even want to stay in the firm.4 Advisor-owners need to make sure they understand all this without making assumptions. For situations in which the firm will get handed over to a nonfamily member, the advisor needs to tell that person and start grooming him or her early enough to ensure a smooth transition. And if you can’t find a realistic candidate, you may simply want to sell the firm to a competitor. That requires getting an accurate valuation and conducting due diligence on any potential bidders, all of which take time.

Succession planning for your clients.

Finally, advisors need to ensure that their clients are part of the succession process. Once you have a clear plan for transitioning the business, you need to start thinking in terms of your client relationships. Your clients need to know about your successors, and they need to be comfortable with the handoff.5 Otherwise, you risk losing them to the competition.

There’s a saying that advisors often use with their clients about the need for proactive thinking for the future: Failing to plan is planning to fail. For the many advisors who haven’t put a succession plan in place, that’s good advice.

1 “The Succession Challenge 2018: Why Financial Advisors Are Failing to Plan for the Inevitable,” Financial Planning Association and Janus Henderson Investors, 2018.
2 Mark Tibergien, “Succession Planning in Crisis: When the Dog Catches the Car,” ThinkAdvisor, February 27, 2018.
3 “Now It’s Your Turn: Succession Planning for Financial Advisors,” CUNA Brokerage Services, Inc., Web, Dec. 3, 2018.
4 Thomas Fink, “How to Hand Over the Keys to Your Kingdom,” Financial Planning, Oct. 24, 2018.
5 Kenneth Kiesnoski, “How Financial Advisors Fail to Plan for Their Own Future,” CNBC, Dec. 5, 2017.

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