The Three Deadly Mistakes of Succession Planning

The Three Deadly Mistakes of Succession Planning

Plan ahead to avoid these traps and transition your practice.

As financial advisors know all too well, no one thinks they are going to die. They put off preparing wills; discussions of estate planning, not to mention their own demise, make them uncomfortable. Turns out the same goes for financial advisors; a recent report by Pershing Advisor Solutions says that 70 percent of advisory firms with $5 million or more in revenues either lack a succession plan completely, or at best have an inadequate one. “While it would be logical to assume that smaller advisory firms and solo practices lack the time to invest in succession planning, statistics reveal that this trend persists across RIA firms of all sizes and levels of sophistication,” according to the report, “Developing a Sustainable Business and Succession Plan.”

“When you know you have to go to the doctor, you keep putting it off,” says Kim Dellarocca, head of practice management at Pershing. “It's the characteristics that make us human. It's an element of, ‘Nothing's going to happen to me, nothing's going to happen to my business, everything's going to be fine.’ We all prefer to go through life thinking that way.”

But the price of ignoring the inevitable can be steep, the report warns. First off, high-net-worth clients want to know that their financial plans will continue even if their advisor doesn't, and they may move elsewhere if they aren't convinced a succession strategy is in place, Pershing says. Not having a plan can lower a practice's value and its prospects for a sale. And in the case of practices with single owners, the lack of a solid succession strategy obviously throws a wrench into their own estate plans.

So we all know a plan is needed. But having the wrong plan can be just as disastrous. RIAs, the report observes, are at a disadvantage to larger institutions since no defined or consistent model exists to handle the needs of the retiring advisor. According to Dellarocca, the biggest mistakes advisors make on the succession front include:

  • Building the wrong bench

    Advisors building a management team, with an eye toward selling the business to them at some point in the future, often groom people who mimic the current leadership. In a rapidly changing market, that can be a bad move, Dellarocca says. The clients of the next 10 to 20 years will have different needs than the ones today. In some cases, recruiting may involve stepping outside of the financial advisory box entirely. One wealth manager Dellarocca knows hired his head of marketing from Electronic Arts, the maker of bestselling video games like Mass Effect 3, The Sims and Battlefield, because he felt he needed someone whose skills matched an environment with changing social media demands.

    “Firms have to say, ‘What got me here — to the point where I'm thinking about succession — won't get me there. Who here aligns with what the future of this firm is going to look like?’” Dellarocca says.

  • Turning succession into a horse race

    Telling potential successors in a practice that they all have a shot at taking over is asking for trouble. Destructive competition may ensue. Instead, the owner needs to send a message about the value that the successors represent to the firm.

    “‘We want to make an investment in you. We're going to put a development plan together. These are the strengths for you to develop,’” is the best message, Dellarocca says. “That takes the competition out of it, and instead focuses on building a great team. Whoever the successor is is going to need a strong management team. And the more people invested because they're also owners of the firm, the better.”

  • Acting out of fear

    Envisioning your death and the subsequent collapse of your practice may engender some action on succession planning, but it's not the best way to approach it. Dellarocca prefers an exercise she uses with advisors seeking other ways to get started. She tells them to close their eyes and think about their loved ones, their employees, and their investors — people who have put their trust in the advisor. She then asks them how the lack of a strategy would affect those three groups.

“You can put a face to anything,” she says. “All I need to finish my estate planning is to think about my son. When you think about these groups that are counting on you, that really starts the process from a place of heart.”

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