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Succession Planning for Financial Advisory Practices

Succession planning has rightfully become an important consideration of financial advisory firms. As a financial advisor who acts as a fiduciary, it is vital to have a plan in place. This may already be taken care of internally if you are an employee, partner or owner in a larger firm. But in a smaller firm, or one where you are the only advisor, it may present more of a challenge. The reality is, no matter what size your firm is, it is important to have a plan in place.

Succession Planning Ensures Continuity for the Clients

As fiduciaries, it is important to make sure our clients are cared for in the event of us retiring or if something were to happen to us unexpectedly.  Clients entrust us with their goals and the assets they have accumulated over their lifetime. It is in the client’s best interest to have continuity of care and not be put in a position where they no longer receive the advice you have been providing without finding a new advisor. The plan you implement for your firm should be a good fit for your clients and their needs.

Advisors Need a Plan in Place for Themselves

What would happen to your business if something happened to you unexpectedly? This could force your family to run, maintain and eventually sell your practice. In many cases family members do not have the expertise needed to run or sell a financial advisory practice, would ultimately lead to a significant decrease in value that would worsen over time. Clients might be understanding for awhile following an event, but they will eventually begin to look for a new advisor if you have not made the proper arrangements. They want to make sure their financial best interests are being looked after. 

This succession plan can also be used upon retirement. 

How to Put a Succession Plan in Place

Now that we know why a succession plan is important, let’s explore several ways you can put a plan in place. One of the easiest ways to find a successor is by hiring a junior partner or advisor and training them for an advisory role in your practice. This is an excellent way to have someone who will run the practice in the same manner as yourself when the time comes. However, this scenario could present a problem if the junior partner doesn't progress quickly enough, departs for another firm or does not have the capital necessary at the time of a succession event. 

Some succession plans are made where two advisors are the successors for each other. This satisfies the concern of continuity for the client but may present a challenge when you are looking to monetize your practice for your family. (For related reading, see: How to Create a Business Succession Plan.)

Using an RIA Aggregator

One ideal way to ensure proper succession for a smaller firm is to align themselves with an RIA aggregator. There are several of these types of firms out there, including Focus Financial. Firms like Focus allow you to sign an agreement after a thorough vetting process with one of their partner firms, ensuring continuity for your clients as well as the liquidity needed upon a succession event. The agreement remains in place as long as you want and can be severed with 30 days’ notice at any time.

As the owner of your firm or practice, you have the ability to invoke the agreement upon retirement, disability or at any other time while the agreement is in place. Your estate will also have the ability to put this in place upon your demise. This arrangement eliminates the concerns regarding the potential buyer’s ability to service and maintain your clients and compensate you or your family.

The important thing is to have a plan in place and make sure it is a good fit for you and your clients. Your succession partner should have a similar philosophy to you and the finances needed at the time of a succession event. A succession plan will let you sleep better at night knowing your clients and family will be taken care of in the event you are not able to do it yourself.

(For more from this author, see: The Importance of Having a Business Exit Strategy.)


Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.