The baby boom generation’s imminent retirement will catalyze many adjustments in our society and in our industry. Like many of the closely-held business clients they advise, a lot of the industry’s most seasoned financial professionals have begun to think about life after work. The time has come for them to heed their own advice for creating a proper business succession plan.
As top producers begin to retire, the industry, field distribution organizations and the producers themselves are grappling with how best to transition to the next generation, while maintaining seamless client care. Losing such time-tested talent and experience all at once could send the industry into a tailspin if younger advisors are not primed to take charge. Tese junior associates could be left overwhelmed and poised for failure if the transition is not appropriate and well-orchestrated.
As producers examine the factors contributing to the growth and continuation of the practice they have spent a lifetime building, turning to distribution organizations as a strategic business partner in this process may prove invaluable. Experience tells us that even producers who have been independent for much of their working years will look to larger distribution organizations to play a role during this stage of their careers. And, they will likely receive the support they seek, since more companies are seeing that succession planning for the industry’s top producers is a benefit to their organizations.
Distribution organizations realize that providing succession planning support to top producers will help to retain producers already affiliated with the company while attracting additional seasoned producers. Providing succession planning support also will offset the number of orphaned policies, while affording the company a role in the selection of appropriate successors to maintain high client satisfaction and business retention.
Producers benefit from this assistance through support with formal business valuations, help with identifying and contacting potential successors, guidance for drafting a comprehensive succession plan, and help with the economics of the transition, including the structure and financing of the buy-out by the junior associate.
The 3-pronged approach
Unfortunately, not all successor relationships work out. Various factors from failure to gain financing to dissimilar work styles to inadequate transition time may all contribute to the failure of these arrangements.
Research and experience indicate that solid succession plans address 3 components of the transition, all different yet equally important to a smooth changeover: ownership transition, management transition and client transition.
Ownership transition deals with the legal aspects of transferring business ownership from one advisor to another. The qualifications, both financial and otherwise, of the successor producer must be examined to evaluate suitability.
Management transition addresses the technical aspects of actually taking charge of the practice, including all day-to-day operations, marketing initiatives, accounting responsibilities and management of personnel. Often, if the senior practitioner intends to continue some level of involvement in the practice, this transition runs smoother.
Client transition is a critical component. After all, clients have built a relationship of trust and respect with their advisor, and therefore need to be assured they will continue to receive the same level of attention and service they have come to expect. This component tends to concern advisors most: Will the relationship they have nurtured for decades unravel the moment they leave their practice? They need to know that their clients will be in good hands once they are gone.
When and where to begin
It is important to allot enough time to create and implement a proper succession plan. Those producers who are already planning suggest starting from 3 to 7 years before a producer intends to retire.
As with most complex business decisions, dissecting succession planning into smaller, more manageable steps will help advisors formulate a reasonable action plan to keep the process running smoothly. These steps include:
1. Deciding on a timeline. Proper succession planning can take years.
2. Evaluating the value and scope of support systems. Producers need to learn about all the options available as they begin this important process. Major corporations should be looked at as potential strategic partners willing and able to reinforce the producer’s efforts.
3. Identifying the qualities, characteristics and business practices of a potential successor, bearing in mind the chemistry the senior advisor has with clients, since clients will be most receptive to a new advisor with whom they can connect. Members of distribution organizations can identify a prospective list of colleagues who may fit their requirements. Many branch systems are farming the next generation of highly successful producers, so affiliated advisors should look at the up-and-comers to see if there is a good match.
Independent producers should consider interacting with young talent either through networking groups, the Association for Advanced Life Underwriting, the Million Dollar Round Table, or by teaching CLU or ChFC courses. Also, local attorneys and CPAs may be able to suggest aspiring young advisors they have come across in business dealings.
4. Update all important financial records. Then, bring in a third party to perform an overall business valuation. Before a practice is sold, it is important to know what it is actually worth.
5. Hone mentoring skills. Since the coaching of a junior associate is about to begin, the finer points of mentoring should be revisited to achieve the best results.
6. Approach the best candidate and propose a trial arrangement. This way, both advisors can try it out before making a commitment. Additionally, if the arrangement works and is set to move forward, the wheels will already be in motion. A preliminary written agreement should be considered so both parties know what to expect, as well as which criteria will be used to evaluate the suitability of the arrangement. Some details to include:
– Duration of the trial.
–Economics of the arrangement. How will business be split during the transition?
–Buying the practice. Will the junior partner purchase the practice outright or will there be another arrangement? Will financing assistance be available through a distribution organization?
–The general philosophy and approach to client service should be written down and agreed upon.
7. Begin work-sharing to indoctrinate the junior associate into the practice in full view of your clients. More so than buying a product, customers buy from an advisor they trust. As they become more familiar with a successor, the potential for transition trauma decreases. And, having an obvious succession plan in place may actually cause an uptick in business since clients–and their own successors–will feel confident that they will be in good hands for many more years to come.
A planning protocol
Succession plans often ascend to the top of the priority list when retirement looms near. Yet, they are an important planning protocol even when producers intend to continue working for decades. Whether preparing for the contingency of death, disability or retirement, delineating an exit strategy from a financial services practice is complex, making a proper succession plan all the more necessary.
Senior financial advisors who have grown their book of business advising baby boomer business owners on how best to hand off their life’s work now find themselves walking in those same shoes. The impact of their exit is of serious concern not only to them, but to clients and financial services organizations.
The continuation of their practices and the maintenance of client trust and satisfaction are critical not just to the next generation of their business, but to the next generation of this industry.
Andrew J. McMahon is executive vice president of AXA Equitable Life Insurance Co., New York, N.Y. You may e-mail him at firstname.lastname@example.org.