Succession Planning for Financial Advisors: What's Next?

If you've decided to retire, you may be asking, "What's next?" Ensure a smooth transition – and extract maximum value from your business – with best practices on financial advisor succession planning.

What Is a Financial Advisor Succession Plan?

A financial advisor succession plan is a strategy to pass ownership of a practice to another advisor. Typically, the plan will address short- and long-term planning. 

For example, on short-term planning, what happens in the event of death or disability in an unplanned scenario? At a minimum, all advisors should have a short-term catastrophic plan in place. 

A succession strategy may also include long-term planning which is focused more on retirement and a planned exit. The plan may be the outright sale of the business, either internally or externally, hiring a junior advisor as an eventual successor, or passing your business down to a family member. 

Why Is Succession Planning Important for Financial Advisors? 

Like everyone else, independent financial professionals need a retirement plan. This often comes in the form of a succession plan for their business. Within the next 10 years, almost 40% of financial advisors are expected to retire. Yet, one out of four advisors expecting to transition their business within this timeframe are unsure of their succession plan. However, even if retirement is not on your radar right now, unforeseen events, such as illness, disability, or death can give rise to the need for a business continuity or succession plan. 

Having a plan in place ensures the business, and its clients, are taken care of when a financial advisor-owner leaves the business.  Read more about the importance of succession planning.

3 Benefits of Proactive Succession Planning 

1.    Peace of Mind

After spending decades building your business and guiding your clients, knowing that your legacy of service will be preserved, your clients will be taken care of, and you have a well-thought-out plan to monetize your book of business allows you to focus on your client engagement and business-building efforts. Also, employees feel more confident remaining at a firm with a clear succession plan.

2.    A Succession Plan Makes Your Business More Valuable and Marketable

Whether you are recruiting new advisors to your firm or engaging client prospects, people are more comfortable doing business with a practice that has an eye toward the future. Younger financial advisors will want to join a firm where they have the possibility of buying equity or assuming a role in succession. Clients want continuity in their wealth management planning. And should you wish to acquire other firms prior to executing your plan, the existence of your succession plan is a plus for sellers.

3.    A Succession Plan Gives You an Opportunity to Prepare Next Generation Advisors

If you are working toward an internal succession or leaving your practice to your children or grandchildren, formalizing your intentions lays the groundwork to build your successors’ skills and groom them to ultimately take over the business.

3 Considerations When Creating a Succession Strategy for Your Financial Advisor Practice 

Whether you are a financial advisor considering retirement or a next-generation advisor looking to grow through acquisition, you’ve got an interest in the methodology surrounding succession planning. Done well, a succession plan maintains quality client relationships and allows for a smooth transition of the business.

1. Do You Know Your Practice’s Value?

An advisory business is more than its assets under management or revenue. Your reputation, goodwill, and other intangibles are valuable elements of your practice. Don’t discount them when establishing the value of your business. Other aspects of your practice will influence its value, including the type of revenue generated and your client base must be considered as well. There are various calculators you can use to get the ball rolling. Third-party vendors can also provide expert guidance.

2. Be Sure to Address all the Levels of Succession Planning

Succession planning is a multi-faceted and multi-layered endeavor that is more of a process than an event. As you begin to create your plan, pay close attention to all of these components to ensure an optimal outcome:

• Management succession: develop emerging talent in your practice to help ensure the next generation of managers maintain priorities that align with your own.  
• Ownership succession: who will own the business? This is not who will lead, manage or run the company – though they could be. Generally, this refers to those who will benefit from profits earned by the business.
• Relationship succession: maintain a pipeline of strong managers capable of fostering important relationships.
• Cultural succession: make the continuation of your firm’s culture a priority, so it will endure after you’ve turned over the reins. 
• Leadership succession: find a leader who will be able to earn the respect, trust, and admiration of employees. 

3. Know Your Timeline and Your End Goal

Do you want to exit the business immediately through an outright sale, or merge with another firm and stay on during the transition? Or would you want to groom a successor from among junior partners, or bring someone into your business for the very purpose of succession?  Do you have children with an interest in succeeding you? All of these elements will impact your planning and execution.

3 Components of a Successful Succession Plan 

1.    Put Your Plan in Writing and Socialize it with Your Employees and Family

Planning for the future is second nature to financial advisors. Making sure all stakeholders – including your employees and your family – are aware of your plans will go a long way toward a smooth transition. An added bonus: their insights about you and your business can be very helpful during the planning process.  

2.    Create a Detailed Client Communication Plan 

Once it’s time to implement your succession plan, ensuring your clients are informed of what is happening, why it’s happening, when it’s happening, and what – exactly – it means to them is imperative. Unhappy or confused clients will transform the most carefully constructed plan into a potentially business-ending disaster. Learn more about common client communication myths.

3.    Know What Your Next Chapter Looks Like 

Business owners who do not put effort into figuring out what life “post succession” looks like are often surprised by how difficult the transition is. Protecting your life’s work and your clients is important. Ensuring you have a plan to enjoy the fruits of your labor, whether it’s traveling, volunteering, or taking it easy, is the all-important final aspect of your succession plan roadmap.

Start the succession planning process with the end in mind. Use your goals and priorities to help inform your decisions, and your succession plan becomes a natural part of your business’ life cycle. With a solid succession plan in place, you’ll be protecting your clients, your family, your legacy, and the investment of time, effort, and money you have put into your business.  Need help? Reach out to our Business Consultants for resources and support to get your business on track.