From the February 2008 issue of Boomer Market Advisor • Subscribe!

Drive results through internal succession

Today, independent advisors manage trillions of dollars in client assets and generate billions of dollars in annual revenues. Now imagine an environment where 80 percent of those assets are being managed by advisors over the age of 50.

Given the aging population of professionals in our industry and the limited talent pool of newcomers, this is a distinct possibility in as little as five years. Cerrulli Associates estimates that more than 56 percent of broker/dealer affiliated advisors are over 50, and the average age is 52. With 40 percent of surveyed advisors indicating they plan to retire within the next 5 to 15 years, advisor succession is not a matter of if, but when.

Like the story of the cobbler's children with no shoes, the vast majority of advisors fail to properly develop their business succession plan. It is estimated that only 10 percent of independent advisors have a written succession plan in place. However, for those advisors who have taken the time to develop a well crafted plan, the benefits are substantial. A solid succession strategy allows you to:

  • Maximize the value of your practice

  • Hand pick your successor

  • Fulfill your responsibility to family, clients, and staff

  • Capitalize on your asset while you are young enough to enjoy it

  • Protect your business

  • Retire on your terms

But how do you develop a plan that meets your needs and those of your clients, staff and family? I find that most advisors who develop internal succession strategies are transitioning ownership to key employees over time. One strategy advisors can implement is a goal-based ownership transfer plan. This strategy enables owners to transfer ownership shares to key employees as target goals are achieved.

There are three steps for implementing a goal-based ownership transfer plan:

Step 1: Determine the goals you want to achieve and reward within your practice.

Advisors should think about the goals for their practice and then formulate a succession strategy that will help them achieve these goals by motivating employees. Whether your goal is to sustain a 20 percent revenue growth rate, or to increase your average relationship size, or to grow AUM to $100 million, put a plan in place that allows key employees to participate in achieving these targets. As a simple framework, advisors can use the SMART goals model by setting incentive goals that are: Specific -- Measurable -- Attainable -- Relevant -- Time Bound.

Step 2: Establish qualitative standards for key employees

In addition to the goals defined in Step 1, advisors should include qualitative goals that help ensure the future success of the firm and prepare key employees for their ownership role. These goals can include obtaining a CFP, assuming management responsibilities, supervising staff, cultivating referral relationships and improving service standards. By achieving these goals, key employees grow within the firm and take on additional responsibilities.

Step 3: Monitor, refine and reward results

Advisors should complete performance evaluations at least annually for all employees. These evaluations will cover both the SMART goals established in Step 1 and progress on the qualitative standards that were determined in Step 2. As incentive goals are achieved, key employees will have the opportunity to buy-in to the practice based on the formula you have determined. This buy-in can be done through a variety of methods such as a lump sum purchase, an installment sale with the owner carrying the promissory note or through a profit sharing plan.

While an internal succession plan is certainly not the only option for succession, if executed well, it can create high morale with employees, drive employee retention, reward key contributors and facilitate ownership transition on terms that compliment your retirement aspirations.

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