For a Successor, Many Advisors Look Within

Half of advisors in some stage of succession planning

At the 2013 National Association of Active Investment Managers Annual Conference, Kelli Cruz, a managing director at Pepin Consulting, addressed the importance of succession planning.

Among the most important reasons to have a succession plan is that clients are concerned about it. “What happens to the firm if something happens to you?” Cruz asked attendees on Tuesday.

The next generation of advisors is a vital part of succession planning. For many advisors, Cruz said, the “ideal solution [to succession planning] is an internal successor.” Furthermore, the earlier advisors begin planning, they more options they have available to them. “There’s less runway in front of you in terms of exit strategy,” Cruz said. However, just 36% of advisors have a plan to develop an internal successor.

Finally, she asked, “You plan for your clients’ retirement, but what about yours?”

Cruz referred to a survey her firm conducted for InvestmentNews in 2012. Most advisors want to exit their firms over time, she said, leaving the operations and day-to-day management of the business first.

According to that survey, half of the 400 respondents surveyed were in some stage of succession planning. However, 44% were just “planning to plan.” Of the 6% of respondents who had no plan, Cruz noted the median age was just 46, so their lack of a succession plan was more a reflection of where they were in their careers.

When it comes to transferring ownership of a practice, the biggest challenges are determining compensation and share valuation, Cruz said. To mitigate those challenges and increase the value of the firm, she suggested several objectives for advisors.

It’s important to define a consistent client experience, Cruz said. “Not everyone in the firm is on the same page.” She suggested advisors think about their clients who give referrals; how do they know the people they refer to their advisor will have the same experience? “Advisors need to institutionalize the delivery of advice.”

Advisors should also develop and follow consistent processes for employees. Over time, employees’ responsibilities can blur as jobs change and roles become blended. “It’s hard to create leverage when a lot of people are involved,” she noted.

It’s essential for advisors to create businesses where they are dispensable, Cruz said. “Most of you have probably created businesses where you’re indispensable,” she told attendees. “You have to be willing to give up control and look at multiple owners.”

Referring to a 2010 study, Cruz pointed out that the top performing firms had multiple firms owners, regardless of size.

Regarding employees, “Bad hires come from desperation,” she said. She recommended firm owners “recruit ahead of their need” and constantly be in recruiting mode. Even if they’re not ready to hire someone, they can build a pool of qualified, interested candidates to pull from when the time comes.

Matching a new hire to the firm’s culture is more important than matching them to the job description, Cruz said. “You can teach people” to do certain tasks, but you can’t teach them to fit in with your firm, she pointed out. She stressed that a job descriptions don’t equal goals, though. “Goals tell employees what is expected of them beyond tasks.”

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