Why Advisors Avoid Succession Planning

January 5, 2016

by Jeff Briskin

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Anyone who has attended an advisor conference in the last few years has noticed the increasingly graying hair on attendees’ heads. With so many of our cohort nearing retirement, it is striking how few have taken the appropriate steps to ensure that their practice survives and thrives as they wind down their personal roles in their firms.

For David Maurice, a Certified Financial Planner and co-founder of Carrier, Maurice and Webb Wealth Advisors, planning for the future of his firm has become a key priority.

The Tennessee-based firm recently developed and filled a critical role of chairman of their advisory board, selecting an experienced global business and venture capital professional to help guide the firm toward scalability, sustainability and eventual succession. Maurice and his partners are also currently guiding three younger support staff members along the path to becoming CFPs.

“The growth of our business has always been grounded in our success in building enduring relationships with individuals and families of all ages and stages of life. And right now, we’re focusing on cultivating a new generation of advisors who can bring in younger clients and, perhaps, take over someday when it’s time for us to retire,” Maurice said.

In terms of planning for the future, Maurice and his partners are more forward-thinking than most advisors. According to The Advisor Retirement Wave, a new research report from State Street Global Advisors, less than one-third of advisors approaching retirement have implemented a plan for transitioning their firm, and less than 21% have hired younger advisors to connect with the next generation of clients.

In a recent interview I conducted with Brie Williams, head of practice management at State Street Global Advisors, she spoke about the importance of succession planning and the reasons many advisors avoid it.

“Over the next decade, nearly 70,000 advisors will retire, making succession planning one of the most important practice-management tools in our industry today. With proper planning, an advisory firm owner can not only take the necessary steps to realize full value for the practice, but also transform it into a business designed to endure and prosper well beyond their lifetime,” she said.

While most advisors understand the importance of succession planning, there are a number of reasons that they don’t do it, many of which are grounded in a fear of the unknown. Some are hesitant about ceding control of their firm and their clients to a younger generation. Some lack the ability to identify and recruit people to replace them. And others don’t have the business expertise needed to thoroughly valuate the firm in preparation for a transfer of ownership.

How to overcome the fear of succession planning

While succession planning is a complex task, Williams has ways to make it easier.

“The first step is for you to conduct a candid self-assessment of your future aspirations. Do you want to disengage entirely from the business or stay on in a different role? If you stay, what will your role be? Mentoring new advisors? Serving as a board member? Transitioning key clients? Will you be comfortable giving up control of your firm to new leadership?”

How you answer these questions, Williams said, will help you determine the future state of your firm. Most advisors have three options: Transfer ownership internally; merge with another firm; or sell the practice outright. Each has its unique benefits and challenges and may require years to implement. In the meantime, it’s also critical to prepare for the unexpected. That’s why Williams emphasizes that all advisors should create a continuity plan even if they haven’t begun to explore their succession options.

“The continuity plan should outline what happens in the event of your sudden death or incapacitation. It should clearly specify who will take over your role, including how your client relationships will be allocated to other advisors. Everyone who is directly affected should receive a copy of this plan so they’ll know exactly what to do should an incident occur,” Williams said.

Any succession plan should begin with a thorough, independent valuation of the practice to ensure that neither seller nor purchaser ends up on the inequitable side of the transaction. According to State Street Global Advisors’ research, key factors to be considered in any valuation exercise are assets under management, client age and tenure, revenue and product mix, operations and technology platforms and client-retention estimates once the deal closes. This valuation should take place at least five years before you plan to transition the firm.

Williams advises against advisors conducting this valuation on their own. “Advisors often overestimate their firm’s value. For example, a recent Cerulli Associates report showed that while advisors estimated the value of their firms to be, on average, 2.7-times their total revenue, the actual average price paid of firms sold in 2014 was closer to 2.1-times revenue,” she said.

Instead, she recommends that advisors hire a third-party resource such as an independent M&A consulting company to conduct this due diligence.

Once the valuation is complete, you are in a better position to consider succession options. If you wish to remain with the firm in some capacity, an internal succession or merger with another firm are typical choices. If your primarily goal is to maximize liquidity, a sale might be in order. Each option has its own benefits and risks.

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Why Advisors Avoid Succession Planning