Advisors Falling Short on Succession Planning

One of the keys that many financial advisors focus on with their clients is business succession planning. Buy-sell agreements and other tools are commonly used to ensure a smooth transition from one owner or partner to another. But many financial advisors themselves are ill prepared to hand the reins of their own practices over to a successor. A study conducted by Fidelity Investments in 2015 revealed that while about two-thirds of every advisory firm would like to change ownership internally, only about a quarter of them have clear successors in place. Only 40% of them have any kind of succession plan. This disparity could cause substantial upheaval in the financial industry if advisors fail to take material steps to rectify the situation.

A Growing Problem

Advisors who are getting near retirement age need to be actively looking for one or more successors for their businesses. If they do not have a designated buyer or other successor ready to step in when they are gone, then they may end up doing their clients a substantial disservice. Fidelity’s study also showed that just over a third of all advisors in the current marketplace will be leaving the business in the next ten years, and many of these have large, established practices. What’s even more unsettling is the fact that of those firms that were polled, about half said that their staff would not, or will not be capable of taking over for them when they leave. And it can take five to ten years to groom someone to take over a business, so those who don’t have clear succession strategies already mapped out need to take action now. (For more, see: FAs Should Factor Clients into Succession Plans.)

The first step is to determine exactly what skills and abilities a successor will need and whether those will be taught to current employees or sought out from an external buyer. And if an internal employee has expressed interest in buying the practice at some point, now is probably a good time to start discussing financing options, which will give a younger buyer more time to prepare.

Fidelity’s study also revealed that a higher percentage of the most successful practices are prepared in this area, with just over half of them having a succession plan in place. A higher percentage have also taken tangible steps to build a succession plan in the past three years, and nearly three-quarters of these firms have a firm mechanism in place that can provide a valuation for their practice when it becomes necessary (compared to about 60% of other firms). (For more, see: How to Create a Business Succession Plan.)

Client Succession

Another key issue that interlocks with the advisory succession dilemma is the current demographics of advisory clientele. Just over a fifth of all current clients are over age 70, and these clients compositely hold just over a quarter of the polled firms’ assets under management. Potential advisory successors need to make a point of getting to know their children and other heirs before they inherit their parents’ wealth. Bridging this generational gap with clients can help successor advisors to generate ongoing revenue from the practices that they purchase or inherit. (For more, see: Tops Tips to Prep Your Advisory Practice for Sale.)

The Bottom Line

Advisors who have devoted their careers to building up their practices need to ensure that their clients are taken care of when they move on. Every advisory firm needs to have a clear idea of what a successor must be able to do to run the business and begin taking tangible steps towards implementing a clear succession plan. (For more, see: Management Tips from Top Financial Advisors.)