The industry has been abuzz with talk about succession planning for a couple of decades, to little effect. In fact, recent data from SEI shows that fewer than 20 percent of advisors have a documented succession plan. Fiduciary responsibility aside, many advisors simply seem to have decided to die with their boots on.
Meanwhile, the hype over purchasing a practice—any practice—has subsided somewhat as prospective buyers become more sophisticated and selective. And, with the average advisor now around 55 years old, many are more interested in securing a future home for their existing clients, even if the transition won’t happen in the foreseeable future.
What does this mean for the tenured advisor who hasn’t yet inked a succession agreement but is still considering it? Is it too late to find a buyer?
Let’s consider a typical scenario
Advisor A began hearing about succession planning around 2000, when he was 62. At the time, his book consisted of 200 households, with average assets of $500,000 per household. The client age range was 50 to 85, with an average age of 65.
Fast-forward 15 years . . .
Now 77, Advisor A remains a solo practitioner. His clients are 80 years old on average, and a third of his book has either passed away or left the firm. Much of the attrition was among younger clients seeking an advisor who would outlast them. Except for a handful of clients, almost all have been in distribution mode for years. Advisor A hasn’t taken on a new client in 15 years and now has 120 households, with assets of $150,000 on average.
At this point, as his clients disappear with increasing frequency, it’s late in the game for Advisor A to start thinking about succession. He could possibly sell a handful of “younger” clients who are asset-rich. Or perhaps he could sell his entire book—but at a much lower rate than it once would have commanded.
How marketable is your book?
This scenario highlights several key factors that affect how attractive a practice will be to potential buyers:
- Client age. The closer clients are to actuarial longevity limits, the less the practice is worth (unless the firm also serves the heirs). Beyond average client age information, buyers are looking for specific supporting data, such as age deciles that correlate to assets held.
- Number of clients and average assets. The smaller the average assets per household (especially in relation to client age), the less the practice is worth.
- Ongoing organic growth. The ability to take on new clients is a litmus test for a practice’s marketability. The older the advisor, the less likely he or she is to bring on new clients, and the less the book is worth. Multigenerational practices that can tap younger clients will excel as the evolution from solo firms to multiadvisor offices continues. In order to attract junior advisors who can help them land new clients, tenured advisors will need to invest in developing structured career development plans—and be willing to formally document internal succession agreements.
What if your opportunity has passed?
Unfortunately, for the tenured advisor whose practice is shrinking and who has done nothing about succession planning, the window to secure a buyer may have closed. If you find yourself in this position, the best course may be to talk candidly with your clients about the future, addressing when, where, and how they should move their assets when you’re no longer able to serve them.
Joni Youngwirth is managing principal, practice management, at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.