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The Future of Succession? A Growth Strategy, Not an Exit

Twenty percent of advisors will likely exit the business voluntarily or involuntarily over the next five years; yet two-thirds of firms don’t have business continuity or succession plans, said Pershing CEO Mark Tibergien, speaking during a session at the Financial Planning Association’s annual conference in Baltimore this week. Advisors need to have a thought-out transition plan to ensure clients are cared for and increase the future value of their practice.

“The old way was that an advisor would practice for 30–40 years, then die,” Tibergien said. “The new way is that you’re going to think of succession and transition as a growth strategy. You’re going to think of this as your fiduciary duty to act in the best interest of your clients. You’re going to think of this as an opportunity to attract new talent and new clients. You’re going to think about this as a way to regenerate your business.”

The Small Business Administration considers any advisory firm generating less than $38.5 million in revenue a small business.

“We are fundamentally small businesses; we are so focused on making a living and dealing with the day-to-day challenges that contemplating what it means to create an orderly transition and professional management for the business is really a struggle for many,” Tibergien said.

And most advisors “die with their boots on.” Fear, inertia or just never getting around to it are impediments to planning for their retirement. But it’s not good for clients.

“Not preparing for the transition really puts the delivery of advice to your clients in great jeopardy, and that should be a concern to everybody who believes they have a responsibility to their clients.”

If advisors take the steps to ensure their business will endure, then they can create a business of value, Tibergien said.

Opportunities for growth abound, and the attitude one brings can be transformative. Since 2008, there are 40,000 fewer financial professionals.

“There’s an oversupply of clients and an undersupply of people providing advice.”

Yet most firms are not yet at critical mass—the level of size where there’s redundancy, the ability to invest in the development of other people, continuity and someone responsible for management. Tibergien considers a firm with between $7 to $10 million in revenue to be at critical mass.

As advisors consider transitioning their business to successors, they should ask, can the next generation get the business to critical mass?

In terms of financials, here’s what the optimal advisory firm should look like: Fair compensation to all professional staff shouldn’t exceed 40 percent of revenue; overhead shouldn’t exceed 30–35 percent of revenue; and that should produce a bottom line of about 30 percent. Instead, most advisory firms have gross profit in the 40–50 percent range, overhead expense ratio in the 40–50 percent range and an operating profit in the 5–15 percent range. Firms need to think of ways to drive cash flow.

One mistake firms often make when planning a succession is to bet on one individual. For every one owner, there should be three potential successors, Tibergien said.

“It’s like concentration of positions in investing. What we know is that one will make it, one may make it with a little help and one has a high probability of making it. But you don’t know which one you’re betting on."

“You have to shift the conversation from a death watch to having time to prepare.”

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