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Practice Management > Succession Planning

3 Exercises for Successful Succession Planning

By David Canter

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If you’re like three-quarters of the investment advisors in the 2011 Fidelity RIA Benchmarking Study, you don’t have a succession plan for your business, or you have one, but it’s not ready to be implemented.

Ask yourself: How would you feel if 75% of your clients did not have wills and estate plans for their families?

You wouldn’t let it happen to your clients, so don’t let it happen to you.

A succession plan is like a will for your business, so why wouldn’t you protect the asset that you’ve built and the families that you serve through a thoughtful succession plan?

Something is holding you back.

I’ve heard a lot of different theories from speaking with advisors across the country, such as “I’m not going to retire,” “I can’t figure out the financial payout,” “I’m too busy with clients,” and the more far-fetched, “I’m not going to die any time soon.”

These may all be factors, but often what underlies them is one core concern: “I don’t know what I want.”

Succession planning is often seen as analogous with the “end state” or technical phases of selling, which involve determining the appropriate valuation and creating timelines. 

Too many advisors are focused on the how and when of succession planning, but they should really start at the why: the reasons and personal motivations behind their strategy. Understanding this first not only helps ensure more successful implementation of a plan, but it also can drive more value to your business, based on what’s most important to you.

This is the same approach you would apply to retirement planning. You’re likely not starting client conversations with how much money they need in retirement. Rather, you’re starting with the personal motivations behind retirement.

To get at the what and the why of succession planning, we’ve identified three core tracks for consideration. To help clients envision their future, post-transition state, we guide them through a creative imagining exercise. We’ve also developed a series of exercises and simple self-assessment tools advisors can use to identify the track that’s best for them.

Track 1 | Internal Transition

Based on our experience, we have seen that advisors who select this track are typically interested in handing over the reins to a junior advisor, family member or internal staff member. These advisors are generally confident that they have the ability to select, hire and mentor someone who will share their same investment philosophy or planning approach. Retaining the firm’s brand culture and client base after the transition is important. This is the path that 60% of firms with gross revenue between $1 million to $3 million intend to take, according to the 2012 FP Transitions Valuation and Transaction database. 

If you’re interested in this track, ask yourself: Does my current situation allow for transition?

Other questions to consider:

  • Do you have the staff identified and in place?
  • If not, do you know where to find them?
  • Are you a good coach and mentor?
  • Have you considered the financial aspect?

Track 2 | Merge and Stay Involved

Advisors who select this track are typically interested in finding like-minded advisors to complement each others’ strengths, leverage similar business cultures and benefit from integrated staff, tools and technologies. These advisors generally have a desire to continue to work after the transition, are willing to meld their investment process and, in some cases, may consider revising their investment philosophy. Being able to take the time to find the right partner firm and deal with the complexities involved in merging two firms are important.

If you’re interested in this track, ask yourself: Do I want to stay involved but find another like-minded advisor?

Other questions to consider:

  • Have you identified a partner firm?
  • Do you know your own culture well enough to assess another firm’s culture?
  • What level of control will you sacrifice?

Track 3 | Sell and Move On

Finally, we have seen that advisors who select this track are typically interested in making a complete exit from the firm and are comfortable with turning the reins entirely over to someone else. There is little or no concern about retaining the firm’s name or brand, and these advisors generally understand that their clients may be redirected into new investment strategies and products. Realizing close to the strategic fair market value of the firm is important.

If you’re interested in this track, ask yourself: Am I ready to leave the business altogether?

Other questions to consider:

  • Do you know how to find a firm that is right for your clients?
  • Are you ready to figure out your next move and get out of the business?
  • Do you know how to establish your firm’s value?

Whether you are early in your practice or thinking about retiring, having a plan to realize the value that you’ve built is critical. Caring for your clients and employees through a transition also requires forethought. The path you take depends on your personal definition of a succession plan. Take some time to consider the what and why of your succession plan.

To quote the author Gary Collins, “We can try to avoid making choices by doing nothing, but even that is a decision.”

Ask yourself one more question: Is that the right decision for your business, your clients and your family?

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