Last May, I penned a feature on a key area of practice management that many advisors overlook: exit planning. The people I interviewed, financial service professionals whose businesses varied widely in scope and direction, all noted that such planning—grooming one or more protégés to assume control of their firms when they retire—is a critical component of their practices.
Why so? A good exit plan can assure the insurance or financial professional of a comfortable retirement income stream; a smooth transition to a junior advisor who, when properly mentored, will provide continuity for the practice and instill loyalty among long-standing and profitable clients; and a high sale for the practice because client relationships have been maintained.
These benefits, however, are falling on deaf ears. That’s evident from a new report published by FA Insight, a Tacoma, Washington-based consulting and research outfit. The 84-page “Study of Advisory Firms: People and Pay” notes that an inability or unwillingness to undertake exit planning is “endemic across the industry.”
The report says the level of succession preparedness is “largely unchanged” since FA Insight last authored a report of this scope in 2009. (With a special focus on “human capital,” the study also explores trends in staffing and compensation, revenue, income and assets under management, firm organizations and career paths, among other areas.)
Two-thirds of the 350 advisory firms surveyed—practices that gross a minimum of $100,000 in annual revenue and that have been in business for at least 12 months—say they don’t have an “adequate succession plan. Within this group, 38% have no exit plan. And only about one-quarter of small firms (those that generate between $100,000 and $500,000 annually) say they feel that they have adequately prepared.
For nearly one in five of the polled firms, exit planning is “not a priority” (no plan exists and the firm is not currently working on one.) Among those firms that have not adequately prepared for a hand-off to the next generation, nearly a quarter say their plan either lacks a suitable successor (14%) or lacks buy-in financing (8%).
The study observes that two factors have created a “near-crisis” in respect to the lack of exit planning: (1) the large percentage of advisory firms whose principals are now close to retirement (51% of primary owners are within 12 years of retirement and about 18% are within seven years); and (2) an increase in the value of the principals’ equity shares in their business, making them potentially less affordable for distribution to the firms’ successor-owners.