For independent advisors, succession planning is quickly becoming the cornerstone of a growth strategy. It is designed to perpetuate an advisor’s business and income streams beyond their lifetime, while providing a multi-generational service platform that attracts and benefits younger advisors. This makes succession planning one of the most, if not the most, important practice management tools in this industry.
With 99 percent of independent financial services and advisory practices going out of business when founders retire, firms must increasingly view succession planning as a growth strategy, not a retirement strategy, according to a white paper released by SEI and FP Transitions.
According to the white paper, Acquisition and Succession: Shift Your Focus from Retirement to Growth, while nearly one-third (32 percent) of advisors claim to have a succession plan, only 17 percent have a binding and actionable agreement. This data points to the need for financial advisors to re-assess their succession planning goals and strategies.
“Advisors are beginning to realize that succession plans and continuity plans can become growth tools,” said John Anderson, head of SEI Practice Management Solutions, SEI Advisor Network.”
According to the paper, when asked specifically about their long-term growth, a majority of advisors fall into one of two camps: those who want to acquire another firm and those who want to grow their firm organically. About one-third (34 percent) of those surveyed have never acquired another firm but have plans to do so. An additional one-third (33 percent) said they wanted to grow their firm by bringing in a new generation. More than half (57 percent) of advisors who have been in business less than five years have never bought a business but think they can grow by buying other firms.
When asked about valuation, another key factor in the succession planning process, a majority of advisors were optimistic. More than one-third (42 percent) of advisors think their firm is valued at one to two times the last 12 months’ revenue. An additional 43 percent think their firm is valued at two to four times the last 12 months’ revenue.
Beyond succession planning, less than half (45 percent) of advisors polled have a continuity plan in place, in the event of an unexpected departure or leave of absence. The data suggests, however, that most advisors have given thought to succession planning and continuity planning, even if they currently do not have all of the tools needed to execute a plan/strategy. Of those without a business continuity plan, nearly three-quarters (69 percent) plan to implement one over the next few years.
When should advisors start planning for succession? The sooner, the better. Every practice is different, and each succession plan requires a well thought-out strategy. To achieve the best results, it is important to tie the succession plan to the overall strategy of the business. Wealth Management offers this advice: begin with deep thought about your objectives and current financial situation and take into consideration the following key questions:
- How much is your retirement lifestyle dependent upon the sale of the practice?
- Are you mentally and emotionally ready to step aside?
- What is the most advantageous way to receive the payout: lump sum or single payment?
- Do you plan to sell your business to a senior or junior partner?
- Is a family member interested in taking over?
- Will your broker-dealer help with the process?
- Will you use the services of an outside, unbiased platform?
Financial Planning offers these tips when formulating the succession plan:
Be clear about your retirement goals. How you’ll receive your payout – either a lump sum or ongoing revenue stream, for example – is important but being mentally ready to step aside may be an even bigger issue. So many advisors are focused on the nature of the transition deal that they fail to grapple with how much they’ll miss the business. Have a concrete plan for what you are going to do with your life once you’ve transitioned out.
Nail down your talent. As you decide which employees are most valuable to the business, begin to tie them to the firm. One way to do this is to offer them a minority stake in the business, well before you are ready to step down.
Identify and develop internal talent. If you are interested in internal succession – and many advisors are – start identifying candidates with your team who might be able to lead the business one day. Figure out the criteria for evaluating them and decide the skill sets you’ll need to help them develop into a possible future partner.
Seek outside advice. Many advisors have strong personalities, clear visions, and a lot of drive. They want to continue running their businesses as long as possible, but emotional commitment to the business may create a blind spot. What’s really best for you, your family, your firm, and your clients? A trusted outside advisor can give you valuable feedback.
Create a vision. If you have a vision for how you’ll exit the business, you have a better chance of controlling your destiny. That said, set some strategic objectives. Is your goal to maximize the return on the investment you’ve made? Do you want to create a multi-generational firm? A well-thought-out plan can protect you from making an emotional decision in the event that a bigger firm offers to buy you out.
Leave enough time. Most heads of planning firms, initially, hope to transition their businesses to their employees, but they frequently don’t allow themselves enough time to make that transfer effectively. We would allow yourself a five-year window and there’s nothing wrong with starting much earlier. As counterintuitive as it sounds, those whose businesses are in the early growth stages should start to envision at least the broad outlines of their exit strategy.
Summit Brokerage Services is a member of Cetera Financial Group, RCS Capital Corporation’s (NYSE: RCAP) retail investment advice platform.
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