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Is Succession Planning the Next Practice Management Crisis?

Too often, advisors on the verge of retirement overvalue their business, making it unattractive to potential successors. What they need to do is find a strategic partner who can ensure the continuity of their firm.

A succession crisis looms over our industry like a wall of bricks falling in slow motion. After years of reports beating the drum about our graying industry, there are still too many advisors who have no idea what will happen to their firms after they retire. A recent Cerulli study found nearly one-third of advisors who plan to retire in the next 10 years are unsure of their succession plans. There is still hope for these advisors to sustain the businesses they’ve spent their lifetimes cultivating and to ensure their clients have continuity. But in order to get out from under the falling brick wall, they need to understand how they got there in the first place.

For some advisors, an inability to plan for their firm’s future ties directly to their inability to understand the value of their own business in the present. In other words, retiring principals can over-value their firms to the point where successors don’t want to take the reins.

Traditional metrics value these firms at a multiple of their current EBITDA, which produces a hefty valuation for most mature advisories. The problem with this kind of valuation is that it misses what is plainly evident to prospective successors: If the principal is working with clients in their own age group, as is often the case, those clients are at the cusp of retirement too.

If half of the firm’s clients are in distribution, then would-be successors would find themselves in control of a shrinking business. This is the end result of a firm that has not invested in next-generation hires or connected with the financial life priorities of emerging wealth builders. Graying firms are simply not worth what their owners think, and prospective hires are not willing to take what amounts to a personal loan to satisfy an owner’s valuation number.

It’s hard for firms in this increasingly common position to turn on a dime … and yet the clock is ticking. In just 5 years, TD Ameritrade estimates 41 percent of new clients will be Generation X or millennials. Acquiring new technology and training is an expensive proposition that can potentially upend the workflow of everyone in a firm. It can be difficult to reinvent the client experience wheel even if the firm has awakened to the reality that the future of margins is in advice, rather than one-and-done financial plans or asset management that can be done better and cheaper by machines.

And all of these things are that much harder if the firm has not invested in the resources to backfill an aging clientele or court the reported 11.7 percent of advisors who are under aged 35 to better relate to next-generation clients.

Firms in this position cannot turn back the clock. But they can do the next best thing: find a strategic partner to help them cut through a thicket of hard choices and ensure the continuity of their business.

A New Lease on Life

Firms in this position should seek a strategic partner with the scale and foresight to address the challenges faced in a time of demographic sea change and industry upheaval. A good partner will have a balance sheet sufficient to attract next-generation talent to the office. A great partner, though, will help keep that talent by filling in other gaps in the practice.

Next-generation clients demand fast answers and mobile-ready convenience. With the right technology, a partner can rejuvenate an advisory by fitting advice more seamlessly into clients’ lives. A partner with proven marketing strategies can help a firm stand out in a field of competitors with identical designations and buzzword-laden websites.

Finally, and most importantly, the right partner will understand that clients will pay for what they value most: dynamic advice in financial situations with high risk and high complexity. The tools a partner provides should help advisors guide next-generation clients through the big questions in their financial lives: Can they afford college for their children as tuition rises year after year? How should their finances change after marriage (or divorce)? Will they be OK after an unexpected setback?

There are no quick, easy answers for a firm without a clear successor or any investment in the future proofing itself. But finding the right ally can give an advisory time and resources to build a bridge to the next generation of financial life managers and the clients they serve.

Matt Brinker is Chief Business Development Officer and Head of Acquisitions at United Capital.  Follow him at @mkbrinker.

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