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.”