This is an extended version of an article that appeared in the July issue of Investment Advisor.
As a smart financial advisor, you want to maximize the value of your most valuable asset—your practice. Merger and acquisition professionals suggest beginning succession planning at least 10 years ahead of transitioning a practice, but only 6% of advisors are doing so, according to a recent research study commissioned by NFP Advisor Services Group and produced by leading independent research firm Aite Group. An even scarier statistic: A whopping 42% of advisors who are within two years of transitioning their practice to a successor lack a succession plan. The same study shows that advisors aren’t realistic about the factors that impact practice valuation.
“The Efficient Frontier of Succession: Maximizing Practice Value” is based on interviews with M&A consultants and leading buyers of advisor practices, as well as on a national survey of practice owners, quantifies the current state of succession planning by financial advisors and suggests solutions.
Succession isn’t a concern only for near-retirement practice owners. The next generation of advisors who take over practices will benefit from the legacy of savvy succession planning. So too will clients, who can feel torn by the transition to new advisors. You should also consider the possibility of unexpectedly becoming disabled. The sooner you start planning, the better you, the new owners and your clients will fare.
What Your Peers Are Reading
Practice owners who view succession as a long-term process, rather than simply an event, can minimize the pain and maximize the gain they achieve when they finally leave the business they’ve built up over the years. This issue has industry-wide implications, as 39% of advisors surveyed said they plan to transition their practice to a successor within the next 10 years. The quality of the upcoming large-scale transition will affect how positively—or negatively—individuals view the financial advisory business.
Advisors Are Waiting Too Long
Advisors know the value of aiming for the efficient frontier in their clients’ investments, balancing risk and reward over a long time horizon. But they’re failing to apply the same methodical approach to their practices. As a result, they’re shortchanging themselves.
Advisors have unrealistic expectations about how long it takes to implement a succession plan. Almost 70% of survey respondents said it takes five years or less. This figure includes 26% who responded that it would take two years or less. Only 11% of advisors believed succession would take six years or more. As mentioned above, many advisors are approaching transitions without any plan.