“In our view, transitioning control and management of [advisory] firms from founding owners to a new generation will prove to be the single most challenging issue for advisory firms over the coming decade. ”
So say Dan Inveen and Eliza De Pardo in their “FA Insight 2011 Study of Advisory Firms: People and Pay.” The study includes the usual analysis of the current business climate for independent advisory firms (it looks like the 2008 recession is finally behind us) and how the top firms in each of four size categories got that way—but what’s truly new about this study is its thorough analysis of the industry’s preparedness to deal with the looming retirement of all those baby boom advisors. The short answer is it’s not.
As we move deep into the fourth quarter, FA Insight reveals that few firms have taken serious steps to either realize the value that these business founders have created or to ensure an orderly transition of their firms and the continued care of their clients. With an estimated $3.5 trillion or so in AUM expected to change hands in the next 10 to 15 years, FA Insight’s findings suggest that the future of the independent industry is literally up for grabs.
The study found that the disparity in income per owner for the top 25% Standout firms versus the other 75% of firms increases dramatically as firms get larger. With Operators (firms with under $500,000 in annual revenues), income is virtually the same for both groups at around $135,000, but for Cultivators (revenues of $500,000 to $1.5 million), the Standout firms posted 30.7% higher owner’s income; Accelerators ($1.5 million to $3 million) had 25.7% higher income; and the top 25% of Innovators (more than $3 million in revenues) posted an average of 106.3% higher income.
FA Insight explains the differences this way: “This is a result of Standouts tending to employ fewer non-professionals per professional compared to other firms.” This minimization of non-professional staff is also seen in higher “people” costs as a percentage of total expenses for Standouts in every category, as well as substantially more clients and revenue per full-time employee.
But as I mentioned, it’s the FA Insight data on transitioning the ownership of firms (or lack thereof) that’s most telling for the industry’s future. Fully 51% of primary owners (that is, owners with more than 5% equity in their firms) are within 12 years of retirement. Yet, the number of firms that are preparing for this transition is shocking, especially considering we’re talking about financial planners here. Of the firms studied, a meager 18% are currently implementing a succession plan, while another paltry 16% have an “adequate plan,” but aren’t implementing it at this time.
Of the remaining 66% (that’s two out of three firms, folks), 28% have a plan, but lack financing, a successor or are inadequate for other reasons; and 38% are either “preparing” a plan or have no plan at all. Perhaps most surprising (which I think you’ll agree has to be pretty darn surprising) is that the Standouts (top 25%) in the larger firm categories have the lowest percentages of adequate succession plans. (See chart, below.) Yes, you read that right: The larger firms tend to be the least prepared to transition their firms.