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Success in Succession Planning
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Make These Moves to Set Up Your Own Succession Plan

Without a detailed succession plan, financial advisors risk not being able to sell in time, selling for less than their practice is worth and a litany of other potential problems.

According to Cerulli Associates, 41% of wirehouse advisors expect to retire in the next 10 years, putting in transition 45% of client assets. With the predicted acceleration of advisor retirement within the decade, succession plans matter now more than ever. Although the overwhelming majority of financial advisors understand the potential harms of going without a succession plan, roughly 73% report not having a formal plan in place.

After spending your entire career building a practice from the ground up, the last thing you want is for it to undergo a shaky transition period after you retire. Not only can that result in the loss of a substantial portion of your retirement income if you invested heavily in your own success, but it can also result in the total dissolution of your practice.

To maximize the value of your remaining assets, you need to be sure your practice has a solid plan with detailed steps for what to do when you are no longer around to lead it. Whether through accident or planned retirement, the loss of a firm’s figurehead and founder can wreak havoc.

Even so, roughly a quarter of the more than 100,000 financial advisors planning to retire this coming decade have no plan whatsoever.

The Purpose of a Succession Plan

These plans aren't necessarily doom-and-gloom apocalypse documents. They cover the bases your practice needs to stay shielded from darkness once you're no longer around to guide it toward the light.

Even if your plan is to sell your business, you need to have an effective succession plan in place when the time comes. Without a detailed plan, you risk not being able to sell in time, selling for less than your practice is worth and a litany of other potential problems.

Proactively Planning for an Uncertain Future

An advisor's succession plan needs to answer the question of "What happens if something happens to you?" While you don't need a crystal ball to answer that, you do need a business valuation. If you don't know the value of your assets, it will be virtually impossible to sell for the right price, at the right time or to the right person.

By accounting for all tangible and intangible assets, conducting a thorough internal audit and potentially even partnering with an independent valuator, you can set yourself—and your practice—up for a realistic valuation.

Regularly tracking these valuation metrics can ensure not only an accurate valuation but also that the valuation is protected and improved upon over time.

What to Expect During an Advisory Practice Transition

This largely depends on whether the sale of the practice is internal or external—that is, whether it is being sold to a family member, a partner or someone else at your broker/dealer.

Internal sales involve longer planning phases, typically including a detailed and in-depth training or trial period. These sales are often paid in the form of a pension to the previous owner.

Aside from that, both internal and external sales involve either a business loan or the transfer of tangible and intangible capital. These sales are often paid in the form of monthly payments based on a 12-month revenue valuation.

How to Improve Upon and Protect Your Valuation

Depending on the quality of your succession plan, the day the event occurs can either be one of nightmares or a total relief. In order to add value to your firm or simply prevent anything from harming your valuation, every succession plan needs to have a few common qualities.

Continuity Plans

A great continuity plan is so visible to your clients that it's impossible to miss. Clients who know about and understand your continuity plan will be more likely to stay loyal, increasing the value of your book of business.

A Profile of the Perfect (and Nonperfect) Successors

Knowing exactly who you want as a successor and who you're willing to settle for makes transitioning this person into the driver’s seat a smoother process. Working with other leaders in your network can make it easier to find the young, hungry and well-suited advisor who you can trust with your clients when you're no longer around.

Position Your Firm for the Next Generation

Whether you select the perfect successor, an acceptable successor or none at all, positioning your firm to compete with the next generation is a critical part of its future success. Spend time connecting with younger advisors at your b/d so you can better understand how your practice might be handled when you retire.

Mergers, Sales and Acquisitions: How Your Brand Fits Into the Equation

Your prospective buyers will likely be younger advisors looking to leap into leadership. When buying, these advisors tend to look for security, revenue and proof of viability. That means one thing is key: your book of business.

If your clients are liable to leave your firm the moment you do, your valuation is going to suffer immensely and the prospective buyer—who is looking primarily to acquire your clients—will have no reason to buy. That's where a solid continuity plan and trial period comes in.

Once your potential successor gets familiarized with your practice, they’ll likely take a cut-and-dried approach to examining your assets. The goal here is to ensure that your practice has everything it needs for daily, monthly and yearly operation even when you're not around.

That often involves sticking around for months or even years during the transition phase to provide them with detailed, face-to-face introductions with every client as part of the purchasing agreement. Ensuring your successor works as well as or better than you do with your clients is vital to a successful transition.

Mergers and acquisitions are viable ways for buyers to avoid having to endure the financially strenuous startup phase. After performing a culture audit, the prospective successor typically organizes the finances needed for the purchase and moves forward with purchasing.

Then comes the reorganizing of the team structure, further internal audits and other workforce reallocations and restructuring.

If You Were Your Own Client, You'd Tell Yourself to Create a Succession Plan ASAP

There's a reason the majority of financial advisors agree that succession plans are so important. It's time to start taking some of your own advice and make a few of the fundamental moves you so often advise your clients to make.

That means setting aside the time to create a sound and effective succession plan and thereby securing your practice’s future for decades to come.

Mike Walters is the chief executive officer of USA Financial and the host of Advisor Skinny, an original podcast for financial advisors aimed at helping them enhance the enterprise values of their firms.

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