For business owners in any industry, a successful exit is an integral part of the business lifecycle, as it is the vehicle by which these entrepreneurs monetize their years of hard work and ensure their business – and its clients – are in good hands. In wealth management, demographic trends have put this strategic planning element in the spotlight. However, upwards of 25% of financial advisors – some studies put the number higher – do not have a succession plan in place.
Our industry is looking at an overall decrease in total advisors. It’s forecasted that tens of thousands of advisors are retiring each year with not nearly as many new advisors entering the industry. As a result, consolidation is feeding a flurry of private-equity-backed firms and record-setting prices buyers are willing to pay. In addition, greater efficiencies driven by technology and other tools and resources will, I believe, eventually allow advisors to service twice as many clients. Succession planning – or the lack thereof among financial advisors – is fueling these two significant trends.
In my day-to-day interactions with financial advisors, I find that the “why” behind this dangerous avoidance runs the gamut, from the complexity associated with getting it right to taking a short-term outlook and from the emotional toll of letting go of something so near and dear, to just not knowing where to begin. These are costly speed bumps. The best formulated – and potentially lucrative – succession plans are put in motion 10 years in advance.
It’s never too soon to begin putting a plan in place, but is it ever too late? How can financial advisors late to the process effectively get on track, if they can at all? As with all complex planning, leveraging the advice of a specialist with expertise in the subject matter is perhaps the best first step to help advisors understand the process, what to do to prep their business, help them set the right price and then market the business to potential buyers to maximize the offer as well as the fit. After all, finding the right buyer can be more important than price.
With that that mind, I spoke with three wealth management industry executives whose roles position them to offer informed insights into succession planning in the wealth management industry, how to approach it and why it’s so important:
- Jason Inglis, Chief Revenue Officer, Sowell Management, a privately held North Little Rock, Arkansas-based RIA firm serving IARs and RIAs across the country
- Andrea Shafer, Executive Vice President and Chief Supervision Officer, Cambridge Investment Research, a financial solutions firm focused on serving independent financial professionals and their clients
- Jesse Kurrasch, Chief Operating Officer, The AmeriFlex Group, a Las Vegas-based advisor-owned hybrid RIA
I posed these questions to our experts:
- What is the optimal timeline for laying the groundwork and finalizing a succession plan?
- What are the elements that must be captured?
- Is there an optimal plan of attack?
- How can financial advisors late to the process effectively get on track?
Here’s what they had to say.
Jason Inglis, Chief Revenue Officer, Sowell Management
We are in the midst of the greatest generational wealth transfer in history and advisors, like their clients, are in desperate need of succession planning. There are many frustrations and fears that drive advisors to inaction. However, without a clear, written succession plan, financial advisors put more than their life’s work and single greatest asset at risk – they risk the financial well-being of their clients.
Beyond preparing for the future, succession planning is also about having a course of action in place now for any unexpected bumps in the road. The optimal timeline for a financial advisor’s succession plan typically spans 5 to 10 years, allowing sufficient time for groundwork, preparation and execution. Planning early can ensure maximum value, seamless transition and client retention.
Here’s a breakdown of the timeline, which addresses the key elements of successor identification and training, comprehensive valuation and tax planning*,* client transition strategy, and legal and compliance frameworks.
5-7 Years Before Exit:
- Define business goals, legacy and exit timeline.
- Identify potential successors, whether internal (employees) or external (mergers or acquisitions).
- Begin preparing successors with the necessary skills, knowledge and client relationships.
- Conduct a valuation of the business and address any gaps that could impact sale value.
2-3 Years Before Exit:
- Formalize the transition plan, including financial terms and legal frameworks.
- Gradually begin to transition client relationships and responsibilities to the successor.
- Communicate with key clients about the succession plan to build trust and ensure smooth transitions.
Final 1-2 Years:
- Finalize legal and financial documentation, such as buy-sell agreements, tax strategies and compliance.
- Complete the handover of all business operations and finalize post-transition roles.
The optimal plan of attack involves an early start, clear communication and gradual handover to ensure continuity, client trust and maximum business value. Proper succession planning ensures business continuity, client retention, preservation of value and, most importantly, regulatory compliance.
Financial advisors late to the succession planning process can still effectively get on track by taking a focused and expedited approach. Late starters can still achieve a successful and efficient transition by acting decisively and leveraging professional expertise. Start by assessing the current business, then seek professional help and identify successors or buyers quickly.
Once a successor has been identified the advisor needs to accelerate the client transition by introducing clients to the successor as soon as possible. Legal and tax considerations need to be tackled immediately. Fast-track legal agreements, such as buy-sell arrangements and estate planning, while addressing tax implications to avoid costly delays or surprises.
The bottom line: If an advisor is late to the succession party, the best course of action is to seek help from a professional. In this case, it is the advisor that needs an advisor.
Andrea Shafer, Executive Vice President And Chief Supervision Officer, Cambridge Investment Research
In many ways, long-term, personal relationships are the engine that drives this industry. That’s the case with clients and advisors, and it’s also true about aging advisors, their succession plan partners and existing clients. The sooner all these parties can come together and develop a rapport with one another, the smoother the succession plans tend to be. If executed well, the departure of a retiring advisor will have no impact on the operation of the firm or the client experience.
At our firm, for example, we work to ensure that our next-generation advisors have the core competencies to create meaningful relationships through a study group designed to provide Next Gen professionals with the tools, solutions and skills they need to step into an evolving industry and maintain strong client engagements. We also have a council of advisors under the age of 45 focused on forward-thinking topics such as business models, developing next-generation advisors, attracting and serving next-generation investors, client experience and technology.
By focusing on developing younger talent, a firm can reduce the apprehension that advisors approaching retirement may feel about leaving their practices. A firm should also have a team dedicated to succession and acquisition that works with advisors one-on-one to develop their succession and continuity plans.
Many succession planning programs focus solely on retiring advisors’ needs and desires – which are important but aren’t the complete story. To develop a comprehensive plan that caters to all parties involved, we must look at the entire practice and the essential relationships upon which it will continue to grow.
Jesse Kurrasch, Chief Operating Officer, The AmeriFlex Group
The average age of a financial advisor is north of 55 – meaning advisors are rapidly approaching retirement. Cerulli estimates that 37% of financial advisors will retire within the next eight years. Estimates suggest that one-quarter of these aging advisors have no plans in place to execute their retirement. Unfortunately, they are inescapably tied to one of several fates –forced to continue working for lack of an exit strategy; pushed into a fire sale of their practice when forced to retire by illness, injury or natural causes; or leaving their clients without service and their heirs without an inheritance if disaster strikes.
Financial advisors would not recommend their clients retire without a plan, yet they commonly run their practices this way, leading to low sales prices, poor client service and ultimately negative outcomes for all – including a potential buyer.
What many advisors miss is that a financial planning practice is a business and should be run as one. In this regard, it is never too early to start planning for succession. The structure of your book (how fees are paid and investment strategy), hardening of a value proposition, transportability of assets and profit margins are all things to consider from the start.
Valuations can be performed annually, if desired, so that an advisor has a consistent idea of what the practice is worth. But this is less necessary than a thoughtful construction of the business. As advisors begin to approach the “red zone,” around five years out from a desired succession date, we suggest annual valuations to see the trend in the business.
The “industry average” of three times gross is not always the case, depending on asset allocation and location and the terms of the deal (e.g., not having a succession plan in place). It’s much better to have a clear idea of what the practice is worth in advance. When it comes to the formal transition plan – the period of time that includes a firm offer to buy and transitioning of the clients – a one-year timeline is usually best, in order to give the successor advisor time to integrate fully with their new clients.
If an advisor is late to the succession process, it’s important to take a step back and examine why: Have they experienced a health event? Are they looking to retire to spend more time with family? Has their practice suddenly become worth a lot more? Each of these situations may lead to a slightly different strategy. Working with a knowledgeable team can have the best outcome in a time-crunched situation.
This is the time to execute – on a valuation, on a deal structure, and on price and terms. Selling a practice is a zero-sum game, so it’s important to work with a partner who has your best interests in mind and can help get you the appropriate purchase price for your practice. This means a partner that is well capitalized and able to access sources of capital to complete the transaction.
Jeff Nash is CEO and Co-Founder of Bridgemark Strategies, a consultancy firm that helps financial advisors evaluate and execute transitions, and provides M&A, succession planning and buy/sell guidance.
