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Four Misconceptions About Succession Planning

Four Misconceptions About Succession Planning

Don't let them get in the way of planning for the future

Independent financial advisors face many challenges on a day-to-day basis.  At the typical firm the advisor is forced to think about marketing and client service, investments, administration and compliance. There are so many tasks, in fact, that succession planning probably doesn’t even make the list for many.  There are staggering statistics that suggest this needs to change. According to an SEI survey, 70 percent of advisors don’t have a succession plan.  By succession plan, I mean a formal, written document – not a hint or an idea that someone may buy my practice down the road. 

I have always been curious why an industry that prides itself on planning for the future for clients does such a poor job of planning for itself?  I guess some advisors put off planning because of their emotional ties to their firm.  Imagining retirement is laden with so much emotion and so many unknowns, it’s an easy subject to postpone or avoid altogether.  Others intend to work indefinitely, and won’t map out a plan for succession or continuity.  However, FP Transitions notes that 99 percent of today’s independent financial practices won’t survive their founder’s retirement.   After building a business for 10 years, 20 years or longer, is that the type of legacy that advisors want to leave?

Increasingly, the industry is viewing succession planning as a tool that positions a business for future growth.  To achieve this, advisors need to commit to a plan and put it in writing, because having an idea isn’t enough.  There are some obstacles to hurdle along the way to instituting the ideal succession plan.  To help you get started on the right path, below are four misconceptions associated with succession planning and how to avoid letting them influence your plan.


  1. Succession Planning is Retirement Planning: To understand the difference, look at the definitions.  According to FP Transitions, succession is a gradual transition of ownership and leadership to the next generation.  It’s a holistic approach to ensure a firm’s survival and more importantly, its ongoing success. That includes, but is not limited to, retirement planning.  On its own, retirement planning often ignores the welfare of clients because it doesn’t provide a plan to deal with an interruption in services.  For the firm’s leadership, retirement planning is important in order to establish a timeline for the succession plan.  As a whole retirement planning is personal, while succession planning is about the business.
  2. It’ll be Easy to Sell My Business When I’m Ready: While it is a seller’s market – with practice values increasing and the estimated buyer-to-seller ratio at 50 to 1 – selling a firm isn’t easy and it is not going to get easier in the future.  There are plenty of steps in between deciding to sell and closing the deal, including finding the right partner – generally a larger firm with similar philosophies – and working out the terms, language of the deal and financing options. Most advisors aren’t wired to sell and prefer to keep working indefinitely, but selling is a choice to consider sooner rather than later – especially because of how complex the process is.
  3. Valuation is About Multiplies: If you’re going to sell your firm, you better know how much it’s worth. But valuation is an art, not a science, which means that value is often in the eye of the beholder.  Don’t make the mistake of trying to guesstimate your firm’s value by applying a rule-of-thumb multiple.  Factors like geography, book/transition risk, key person dependency, fees vs. commissions, age of clients and market demand are all important in the valuation process.  It’s not solely about the numbers. 
  4. There’s No Immediate Business Benefit to Succession Planning: Aside from the peace of mind that a succession plan gives to the employees of an independent firm, planning for the future ensures that there can still be a future.  If that’s not enough, creating a plan tells you where you need to go, and reveals insight into how to get there.  That could mean injecting younger talent into the firm, focusing on a niche, growing your client base or focusing more on profit instead of revenue.  In short, the succession plan helps you think more like a business than a practice.


The key to understanding succession planning is in the realization that planning is not an end-game strategy for your business.  It’s about building a company that one day works for you.  Without a plan, things can unravel quickly – to the point where it’s often too late to save the company.  However, if an advisor breaks through these misconceptions, the succession planning process truly becomes a growth strategy for the business.  That way, your firm has a much better chance of being among the one percent that survives its founder’s retirement.



John Anderson is Managing Director of the Practice Management Solutions Team for the SEI Advisor Network. He is the author of SEI’s practice management blog, “Practically Speaking”.

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