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Practice Management > Succession Planning

The secrets to your success(ion)

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It easily could have been dismissed as just one more study from yet another consultant trying to build a buzz around a seemingly inconsequential subject.

But when the global analytics firm Cerulli Associates projected in a February 2014 report that 1 in 3 financial advisors (32 percent) in the United States plans to exit the business within 10 years, it may have drawn much-needed attention to an issue that, if left unaddressed, could cause serious headaches for advisors of just about every ilk, regardless of their skillset, track record, area of specialization or experience.

One way to keep the concern about inadequate succession planning in the advisory community from escalating into a full-blown crisis is for individual advisors to take it upon themselves to confront the issue head-on in their own practices.

“The need for succession support is growing,” Kenton Shirk, associate director at Massachusetts-based Cerulli, observed in releasing the firm’s research. “Finding a suitable succession partner can be a major hurdle that frustrates advisors early in the process.”

That frustration stems from a process that not only can be time-consuming but lengthy. “It can take one year or longer to identify a successor, conduct due diligence, strike a deal, and execute a transition, and the timeline is much longer for those grooming an internal successor,” says Cerulli. What’s more, succession planning “can be especially difficult for [advisors] with a unique specialization, diverse business lines, or a secluded location.”

Add in complicating factors pertaining to client and back-office transition and it’s no wonder the prospect of succession planning can turn the most proactive advisors into foot-dragging, head-in-the-sand procrastinators.

“My sense is that most [advisors] just put it off, that a significant minority [of advisors] haven’t done anything in this area,” says Howard Erman, CFP, EA, president of Erman Retirement Advisory in Seal Beach, Calif.

Yet the demographics suggest succession planning needs to be a front-burner issue for tens of thousands of financial advisors. The average age of financial advisors is  51, and 43 percent are over the age of 55, according to a separate report released by Cerulli in January 2014. 

Erman, who’s in his early 60s but has no intention of retiring anytime soon, says he has an informal succession plan in place, which he soon intends to formalize. Having a succession plan is important for two key reasons, he says: “Number one, you have to protect your family. You could drop dead tomorrow, so you need to plan around what happens to your practice [if you die]. And number two, you have to protect your clients and their interests.”

Clients are no different than most people; they dislike change, Erman notes. This means advisors run the risk of losing clients if they lack a formal succession plan, as June A. Schroeder, CFP, co-founder of Liberty Financial Group, Inc., in Elm Grove, Wis., found out firsthand. Several years ago, a client asked her if she and her practice partner, Tom Wargin, CFP, CFA, had a succession plan in place. “She was not comfortable that we didn’t have one, and we lost her as a client,” Schroeder recalls.

Schroeder says she and Wargin vowed not to let that happen again. They’re close to finalizing a succession plan that calls for Schroeder to sell her stake in the 33-year-old financial planning practice to Wargin, with two in-house successors (one a long-time employee and the other Wargin’s son, David) poised to assume responsibility for a large portion of her clients as she scales back to part-time duty. 

Weighing the options

For Schroeder, the succession planning process has unfolded in fits and starts over the past few years, “with lots of little steps along the way.”

Step one, she says, was to decide whether to anoint an in-house successor (Plan A) or to find an outside buyer, either a boutique planning firm like hers with a similar culture and approach (Plan B) or a large “mega-group” (Plan C). She and Wargin opted for Plan A. “We decided that this was not just a business; this was a family. We wanted our clients to feel comfortable and secure that we would continue providing the services we have always provided them, with people they know and trust.”

Erman says Plan A—having a hand-picked internal successor ready to step in—is his preferred option for similar reasons. “Grooming someone internally who can do the job and shares your philosophy should make the transition more seamless  and the [post-transition] client retention rate higher. You want to have someone whom your clients are comfortable sticking around for. It’s about finding the right person with whom you are comfortable putting your best clients in front of.”

But finding someone internally who fits the bill can be a “tall order,” notes Erman, who should know, having recently watched the advisor whom he’d hired to groom as a potential successor leave his firm abruptly for another opportunity. Based on that experience, he says he’ll also consider eventually selling his practice, with one option being breaking it into “more digestible” pieces that can be sold separately.

Whatever the course of action, the next step is to find a suitable buyer, whether it’s a like-minded practice, which can make the transition easier for clients, or some other third party, such as an institutional investor. A business broker—some specialize in advisory practices—can help not only find a buyer but also get a practice ready for a potential sale. While those services can come at a substantial cost, the investment can be worth it if the broker does its job well, notes Erman.

Having a succession plan in place, along with some kind of buy-sell agreement that is perhaps underpinned by a life insurance policy on the practice principal(s), also helps if, when a principal dies, his or her family is forced to sell the practice (or the deceased’s stake in it). “My business is worth $1.5 million to as much as $2.5 million. If my wife has to dispose of it in a distress sale [without the benefit of proceeds from the life insurance policy], maybe it’s worth $500,000.”

Necessary Steps

Succession planning often involves quite a few moving parts, from laying the initial legal groundwork to packaging the practice for sale to transitioning the business and its clients. 

Usually, it entails bringing in attorneys for the buyer/successor (whether an internal or external one) and seller to help develop a timeline for the process, structure the deal and draw up legal documents, and perhaps a business broker to help the seller make the practice more saleable, in order to maximize value. “All of the sudden, you have to sit down, do the paperwork and make the decisions that make [succession planning] real,” says Schroeder. “That’s the hard part.”

Early in the process, the practice needs to be valued, he adds, whether or not the goal is to hand the reigns to an internal successor or to an outside buyer. Look to get that valuation/appraisal from an objective third-party business valuation firm that’s well versed in the advisory space. Prospective buyers also will likely want key details like the valuation methodology, a detailed overview of the products, services and specializations offered by the practice, a breakdown of the client base (number, age, AUM), how the practice historically fares in up and down markets, and much more, says Schroeder, whose succession plan involves the transfer/sale of stock, with repayment from future profits.

Also, as part of the due diligence, “you have to make sure whoever is buying your practice can afford to pay you what it’s worth,” she adds. If an outside firm is the buyer, does it have the capacity to assume additional clients? Does it have a clean regulatory record?

Then it’s a matter of managing the transition so it goes smoothly for the practice, its employees and its clients alike. “Advisors should communicate their future plans with these stakeholders long before they plan to retire, so they are not left to conjecture,” Cerulli recommends.

On the operational side, the transition might involve steps such as streamlining back office technology, analyzing and documenting practices and processes, detailing brand/marketing standards and guidelines, and developing thorough documentation on clients (perhaps via the practice CRM).

It’s also important to be sure that an advisor’s successor(s) has the requisite professional designations and certifications—a securities license, a life insurance license or a CFP, for example—so they’re qualified to handle client needs, Schroeder points out.

Perhaps most important to a successful transition is getting clients comfortable with whomever is stepping in to fill the void left by the departing advisor. Involving those successors in client meetings, practice communications, answering client questions and requests, etc., “gets them used to working with people, because they’re doing things they haven’t done before, and it gets our clients familiar and comfortable with them,” Schroeder explains.

Helping clients find that comfort level with a new advisor is often a matter of positioning, Erman says. “It’s telling clients, ‘I have found the person who is better than me. I will show you why it’s a smart idea for you to stay with our firm and work with this person.’”

Building the relationship between clients and the successor advisor is “critical,” notes Cerulli, “since client retention determines the amount of value transferred to the seller in the earnout.”

With her own succession looming, Schroeder says she’ll miss the client relationships she’s built over more than three decades. But she acknowledges being ready to transition into retirement. With a succession plan close to finalized, her practice is ready to transition, too. “It was about time,” she says, “that I practiced with my own business what I’ve been preaching to clients all these years about planning ahead.”


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