Slow and Steady Wins the Succession Plan

Integrate successors early to ease transition later, LPL branch manager says

Once advisors accept the inevitable, they can plan for it in a way that they’ll be satisfied with the outcome. Once advisors accept the inevitable, they can plan for it in a way that they’ll be satisfied with the outcome.

“We see it as a process, not a triggering event; not something that just happens and then it’s all done,” Richard Dragotta, a branch manager for LPL Financial, said of succession planning. “Most folks start thinking about it too late, as an event happens.”

“What they don’t realize is the smarter or more successful succession plans have been thought about” for some time, he told ThinkAdvisor on Friday. “Retention is the key to succession. In terms of making that succession planning apparent to your clients, the introductions, the subtleties and the discussions about that need to happen as rapport is built over many years.”

That means that “the guys that decide to retire and say, ‘I’ve figured out who’s a successor’ and one month later they’re gone, the success of that succession plan is going to be poor,” Dragotta said.

The succession planning process begins with “first coming to the conclusion and buying into the idea that the inevitable is going to happen,” Dragotta said. Whether it’s a voluntary retirement or due to a disability, eventually everyone stops working.

However, once advisors accept the inevitable, they can plan for it in a way that they’ll be satisfied with the outcome.

“Some advisors want to slowly sell and stay involved,” Dragotta said. “Others want completely out, so you have to have a sit-down with yourself or with your other partners.”

Dragotta expects many advisors will opt to stay involved in some way with the business they’ve worked so hard to build.

“I think most advisors believe it’s a finale, and for some of them that may be the case,” he said. “What I find is that if you have a great practice and you love what you’re doing — which, most of the advisors that are still in the business at the ages that they are, they must love what they’re doing — that it doesn’t have to be that.”

He continued, “There’s a way that you can monetize your business so that you and your family or your beneficiaries [can benefit] without having to completely leave it.”

Some ways to do that, he said, include ESOP programs or stock options. “We see a lot of folks saying, ‘We’ve agreed upon a price. We’re going to do a work-out over so many years, so I’m collecting a good chunk of that money up front,’” he said. That helps advisors answer the question of “how can they get pension-like income themselves? How can they have ongoing residuals?”

As advisors leave the business, there are plenty of opportunities for other advisors who are willing to develop the expertise they need to serve older clients. The demand for advisors who are experts in specialties like Medicare and Social Security “has never been greater as the baby boomers continue to demand this advice,” Dragotta said. “Yet what’s happening is simple economics — supply and demand.”

He added that demand is only going to get stronger in the next 10 years, while the supply of advisors will “contract quickly.” He said, “I saw a statistic where a third of advisors plan to leave or retire in the next 10 years — $2.3 trillion in assets. Advisors 60 years old or older control $2.3 trillion.”

As for clients, they want to know what your plans are for leaving the business. “Believe it or not, clients ask,” Dragotta said. “At least my observation is if it’s not a topic they’ve asked about, they sure are thinking about it.”

He said that the succession planning topic comes up a lot when advisors start a new relationship, however, “the folks that are going to leave in the next 10 years, their clients have been with them forever. They were both 30 or 40 or 45 when they started, so maybe those conversations back then didn’t come up.”

That’s why it’s so important to make succession planning a process. Dragotta said that if a succession plan has been implemented correctly, advisors will have “slowly integrated a person and their role. They’ve sat on meetings and it’s almost a matter of fact. It’s not a stranger, it’s not someone they met six months ago.”

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