For a profession that prides itself on crunching numbers, analyzing data and creating complex financial strategies, financial advisors often fall far short when it comes to planning for their own futures.
We’ve all seen the Cerulli data—over the next decade, 105,887 advisors plan to retire, accounting for 37.4% of industry headcount and 41.4% of total assets.
What’s more, Cerulli contends that one-quarter (26%) of advisors who anticipate retiring within the next decade are unsure of their succession plans. While I have immense respect for Cerulli Associates and the important research they conduct for our industry, I have a hard time taking that particular number at face value. From my admittedly unscientific observations, most advisors looking to transition out of the business do not have a clear strategy. It’s unlikely that even 5% of these advisors who are approaching retirement have a written, legal and actionable succession plan.
The effective succession and transition of advisory practices is crucial for advisors, wealth management firms and clients.
The lack of succession and continuity planning has long been a concern for the wealth management industry. This is especially true for the independent space, where solo practitioners, who comprise more than half of the advisor headcount, seldom have a built-in backstop if they leave their practice voluntarily or due to an unforeseen issue. The aging advisor population has turned this ongoing concern into an urgent problem that needs to be addressed.
Advisors are experts at financial planning for others, but many are ill-prepared for their own futures. It’s like the old story of the cobbler’s children having no shoes. Advisors help their clients prepare for retirement and emergencies but often neglect to take care of themselves. This not only impacts them, but also their families and their clients. In this fiduciary era, advisors must put their clients’ interests first. There comes a point where that means finding a successor to carry the torch once the advisor retires or can no longer fulfill the job responsibilities.
If you are an advisor, here’s why succession and contingency planning matter:
Compliance and Regulation
Besides it being the right thing to do, there is a regulatory risk of not having a plan in place. Regulators are examining an advisor’s succession/continuity strategy to ensure that if something happens to you, there are contingencies in place to transition your clients into good hands. Ensuring you are protected from compliance trends not only protects you from future regulatory issues but also instills confidence in your clients and stakeholders.
Protecting Your Clients
Contingency planning is not just about protecting your interests but, more importantly, safeguarding your client’s interests. A well-thought-out plan ensures that your clients continue to receive the quality service and unbiased advice they have come to expect, even in your absence.
Ensuring Your Legacy
A sudden departure due to retirement, disability, or unforeseen circumstances should not destroy your life’s work or even disrupt the operations of your advisory business. A well-crafted contingency plan provides a roadmap for a seamless transition, ensuring that your business continues to thrive in your absence and your heirs are compensated for the legacy that you have provided.
Key Elements of a Plan
You don’t need to have all the answers to begin developing your succession/continuity plan. The most important thing you must do is to start! If you are looking at retirement, you should begin the process at least five years out.
Successor Identification
You need to identify your potential successor by setting some criteria for their selection. Ease of transition, understanding of your business, cultural fit and the ability to maintain client relationships should all top your checklist. Remember, the value of your business is contingent upon the retention of your clients and their assets, so choose wisely.
Buy-Sell Agreement
Define the trigger events that would activate the contingency plan, such as retirement, disability or death. You need to sit with your designated successor and establish an agreement detailing the terms and conditions for the sale or transfer of the business. This includes determining the valuation method and the funding mechanism for the purchase. You can make the agreement non-binding, giving you the flexibility to void it before a triggering event if circumstances change.
Conduct a Valuation
Before having a professional valuation conducted on your business, take time to get your financial house in order. Client data, including demographics, growth rates and asset mix, needs to be documented and accurate. When you have a valuation conducted, you must understand drivers and detractors, because recurring revenue is more valuable.
The buyer and seller have a shared risk, shared reward relationship. Be honest with yourself and the buyer about what you want and why. Learn how deals are structured in terms of what is normal and reasonable and understand what you are selling.
Don’t Wait to Start Planning
Succession planning has become an urgent issue for the industry – don’t let it be one for your business. Don’t wait for the unexpected or for retirement to sneak up on you – as a good financial planner, start crafting your strategy today and fortify the future of your advisory business and your legacy. It’s time to practice what you preach – you would never let a client open an IRA without a beneficiary.
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