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Practice Management > Succession Planning

Sounding the Alarm

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Lately an advisor can rarely open a trade publication without coming across at least one article focusing on succession planning. Most of these columns center on how dire the problem is with the hope being that couching lack of preparedness in such alarming terms will inspire advisors to action. Outside of recommendations to begin succession planning sooner, specific solutions are often in short supply.

Frankly, based on our research history we are guilty of perpetuating the succession fixation as well, citing in our recently released “2011 FA Insight Study of Advisory Firms: People and Pay” that lack of preparedness for succession presents “the greatest vulnerability for all firms.” The latest FA Insight study goes further, however, in striving to identify why succession is such a serious challenge and recommending key areas of focus for advisors to improve their preparedness.

Aside from beginning the succession plan sooner, what specific actions should an advisor take? As they look toward someday leaving their businesses, advisors must consider upholding the quality of care of their clients as well as ensuring a smooth transition, in addition to transferring ownership shares.

According to our research, firm owners best positioned to work through all of these aspects of succession are those who have demonstrated the best people practices. How a firm manages and develops its team members plays a critically important role in preparing a firm for succession. The most successful firms deploy people in a way that builds an ongoing business concern that is bigger than one or two key individuals. As a result, these firms tend to have solid options for structuring an internal succession and are attractive to outside buyers as well.

Awareness and Preparedness Do Not Correlate

We will expand on some key people practices shortly, but let’s first revisit some familiar territory regarding the severity of succession ill-preparedness. Our aim is to frame the situation in terms that will add new insight into the underlying factors behind this problem and increase appreciation for why people-related practices are such an important part of the succession solution.

While growing media coverage may be raising awareness of the succession issue, we are yet to see a visible increase in advisor preparedness. Figure 1, (see left), details advisors’ woeful lack of readiness for confronting succession as reported in 2011. Nearly two-thirds of firms do not have an adequate succession plan in place. For nearly one in five firms, succession planning is not a priority. For a good share of other firms (28%), a plan is in place, but it is ineffective, typically because of difficulties in identifying a successor or securing financing for the successor’s buy-in. What is most disturbing about these results is that despite the attention to the topic, succession preparedness has not improved. Responses to this same question in our 2009 study showed a similar distribution.

Even the industry’s best firms, those we refer to as “Standouts” based on their record for generating income and growing revenue, are prone to underperformance as it relates to succession. Only a minority of Standout firms felt they were adequately prepared for succession, with the largest Standouts reporting the greatest challenges.

The most obvious consequence of a lack of an effective succession plan is a severely limited ability for owners to extract liquidity from their businesses upon retirement. Even owners targeting a firm sale to an external buyer are not immune. A firm is a much less desirable target without a ready succession plan in place. Additionally, the uncertainty introduced by lack of a succession plan will hamper firm growth. Recruiting and retention can suffer if owners cannot map a path to equity and demonstrate a clear future for team members. Similarly, clients may be reluctant to maintain relationships with a firm that cannot demonstrate a continuity of care that will outlive founding firm owners.

On the Edge of Crisis

Two related factors are combining to create a near-crisis situation as it relates to succession. First, firms and their founding owners have aged. Second, as owners’ firms have grown over time, their original equity shares have become increasingly valuable and less affordable for the next generation of owners.

The widespread “graying” of the advisor population is well-documented. In the 2011 “People and Pay” study we found 18% of advisory firm owners to be within seven years of retirement and more than half (51%) were within 12 years. In another 2011 study that FA Insight prepared for the Financial Services Institute, 37% of broker-dealer-affiliated advisors were more than 55 years of age, up from 34% just two years prior.

This aging on its own is not surprising—we are yet to come across an individual alive today who fails to grow another year older on an annual basis. The cause for alarm, however, is rooted in an inability to develop new advisors and future ownership prospects at a rate that keeps pace with the wave of owners who are soon heading for the exits. As a result, advisory firm ownership is gradually becoming more concentrated (see Figure 2, above). By 2010, fewer than one in six advisory firm team members owned a 5% or more share in the firm.

Filling the Gap

It is no coincidence that the firms best prepared for succession also demonstrate superiority in managing and developing people. Because of their people practices, these firms have created options for internal succession and, by doing so, increased their appeal if the firm were to look to an external buyer as part of a succession solution.

Internally progressing a team member toward ownership is typically a firm’s preferred succession path. Over the past two years, firms were nearly three times as likely to progress an existing employee into an owner/partner role as opposed to admitting an outside owner. All things equal, an internal succession is lower risk and less disruptive for clients as well as employees. The challenge is in identifying and developing an internal successor and structuring the buy-in over a period of time that is affordable.

Organizational Structure Forms the Foundation

To better understand what distinguishes the most prepared firms, we isolated the 34% of firms in the 2011 FA Insight study that indicated having an adequate succession plan in place. The differences between the people practices of firms with and without an adequate plan were striking. Our findings reveal that the foundation for successfully confronting succession is a firm’s organizational structure. An effective organizational structure can provide a vital road map for grooming and progressing a new generation of firm owners.

Figure 3 displays a number of areas where those firms that are best prepared for succession outshine their counterparts with regard to organizational structure. For the properly prepared firm, management and staff are far more likely to be clear on their roles, responsibilities and reporting relationships. Most important, better prepared firms are more apt to maintain a future vision for their structures. This clear understanding of the distribution of current responsibilities and requirements for individual advancement and firm growth creates a fertile environment for developing succession candidates.

Best-prepared firms further enhance their pool of potential successors as well as the salability of their firms by more proactively developing their people. As shown in Figure 4, firms with an adequate succession plan report a greater propensity to have structured career paths, individual development plans and formal training programs.

Time to Take Action

In our view, transitioning control and management of the firm from founding owners to a new generation will prove to be the single most challenging issue for advisory firms over the coming decade. A lack of succession planning threatens shareholders’ ability to realize liquidity. Additionally, without a proper plan, the continuity of client care and continued opportunity for the firm’s employees are also at risk. Succession planning justifiably has earned a high profile. The time, however, is past due for the industry to move beyond simply framing the issue and to start implementing specific solutions.

More to Come

In the months ahead, Investment Advisor readers can look forward to additional articles that will further explore effective deployment of human capital within advisory firms. Future articles will further probe best practices as they relate to personnel development and transitioning equity. For more comprehensive human capital guidance, including detailed compensation and financial benchmarking data, readers are encouraged to order the complete “2011 FA Insight Study of Advisory Firms: People and Pay” at


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