Advisory firms are finally taking succession planning seriously, according to recent research done by Fidelity Institutional Wealth Services. In fact, not only are more firms taking the time to write succession plans than ever before, but they are also focusing more on how their succession and continuity planning can be used as growth mechanism within the firm.

Ideas for what a successful succession plan entails vary quite a bit. Some firms simply put in place an internal transition plan, while other will look to merge with or be sold to another firm. In either case, the heads of these advisory firms need to keep in mind that a successful transition plan ensures that the firm’s clients’ needs will continue to be met and appropriate resources provided both during the time of the transition and after it has been completed.

Clients Are Watching

Some practice leaders will also need to change how they think about succession planning. They should keep in mind that during times of transition, clients will also be deciding whether or not to stick with the firm throughout the process and afterwards. Therefore, succession planning should not be centered just on the future prospects of any one key person at the firm, but focused on the firm’s clients and employees as well. After all, if advisory firms take their current fiduciary responsibilities to their clients seriously, they should also be making sure that their succession plan is viewed equally as seriously.

That said, many financial advisors views about succession planning do seem to be moving in the right direction. One positive change already taking place is that small firms are also getting on the bandwagon and starting to focus more heavily on their succession planning strategies. Typically, what happens at smaller advisory firms is the firm’s founders begin transitioning out of the business before a solid plan has been put in place. However, in order to make sure that the firm’s clients are being properly cared for, the founders should be considering merging with another small-sized or growth-oriented firm well before they plan on stepping down. (For more, see: Why Clients Fire Financial Advisors.)

Two Firms Are Better Than One

This move may not only help ensure that the firm’s clients continue to receive the high level of attention they have become used to, but that they are also given access to the team of equally qualified advisors at another firm. The two merged firms may also be more capable of offering high quality resources and services once they are working from a larger platform. (For more, see: Ethical Issues For Financial Advisors.)

The same advice holds true for larger firms. They should be looking to integrate smaller firms into their own businesses to ensure that the client services they offer never wane. Paramount during a time of transition and for the years that follow, is that clients never feel that the resources or advisor attention they have become accustomed dwindles.

Firm leaders should also make sure that they have put enough funding in place to make to ensure that any estate tax that is generated from a sale of the firm is covered. The succession plan need not only be comprehensive and efficient, but also transparent. (For related reading, see: Why The Best Financial Advisor Might Be You.)

That said, making sure that clients come first in a succession plan is not always easy. Still, practice leaders need to realize that the business they have developed is their greatest asset, so giving it up or turning it over to another firm can be not only complicated, but emotional as well. That’s why the process of implementing a succession plan should be started years before the founder plans to leave, so that ample time is given to make sure the succession is a smooth one.

Leadership Is Key  

Advisory firms also need to consider whether or not the firm is structured in a way that will aid its survival well into the future once its founder is no longer heading the charge. One good move is to start taking those steps necessary to spread the leadership role throughout the firm before the firm’s head exits. This will better aid all the firm’s employees in preparing for the transition, whether it has been announced ahead of time or not. Either way, both employees and clients need to be made aware that there is, indeed, a transition plan that has been put in place. This will give both clients and employees peace of mind and ensure that they have a vested interest in the firm's future growth.

One example of a firm that has done well in this area can boast that partners now make up 40% of its staff, and there is a well-staffed management team that is focused on how to continue running the business after many of the firm’s leaders have gone. But this is not the case at many other advisory firms, who of which have fallen victim to the trap of failing to spread leadership positions throughout the firm. (For more, see: Shopping For A Financial Advisor.)

Hold Onto Talent

Another key notion that advisory firm leaders should keep in mind is that holding onto talent is imperative. Therefore they should make sure that opportunities have been put in place for top employees to be promoted. They should also implement a succession plan that will give the firm’s top advisors the resources they need to continue caring for their clients. They should also focus on how to hold onto young advisors and give them the opportunities they need to grow within the firm. (For more, see: Paying Your Financial Advisor: Fees or Commissions?)

More Than Just Financial Matters

Finding a succession plan that is beneficial to clients, advisors and stakeholders alike is not always as evident as one would like. It often takes a fair amount of research to find the right match in terms of a merger partner or acquirer. To come up with the best solution, firm leaders should be thinking not just about the financial and economic realities of the deal, but also about finding a firm that shares a similar set of values, culture and overall philosophy. For example, merging firms should see if the can come to a consensus on how to best treat clients before deciding if the two firms are a good fit.

Valuing The Firm

Another key area to look at when contemplating a merger or acquisition is how to accurately value the firm. Typically is the best indicator of a registered investment advisor (RIA) profitability and overall operating efficiency. After all, any prospective buyer will want to be assured that the firm they are purchasing is dependable and that there are both current and future cash flows in place.

The quality of the cash flow and estimated growth rate are important, too, when valuing a firm. Potential buyers will be looking for a stable client base; revenues that come from a recurring, fee-based business; strong margins, and a track record of growth. They will also look at who will be the key players at the firm and if those employees will have been incentivized and committed to operating the firm once the founder’s responsibilities and ownership stake diminishes. Indeed, no buyer wants to worry that the best advisors at a firm they have just acquired decide to leave once the founder has.

The Bottom Line

All in all, evidence is showing that today’s financial advisory firms are being smarter about their succession planning. They are keeping client service at the forefront of their minds and are focusing on finding merger and acquisition partners that make sense in terms of the culture and growth of their own firm. The best-laid succession plans will secure that the legacy of the firm continues for many years to come. (For more, see: Find The Right Financial Advisor.)

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