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5 Steps to Stepping Down From Your Firm

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The pace of retiring advisors continues to accelerate, with almost 70,000 advisors with more than $2 trillion in assets under management retiring over the next decade, according to a new report from State Street Global Advisors.

Despite advisors’ looming plans for retirement, the report – called “The Advisor Retirement Wave: Succession Strategies for a Profitable Transition” – finds that the vast majority of advisors have yet to establish a succession plan.

In fact, the report says that two-thirds of all practice owners do not have a succession plan in place and 6% have “only a partially completed plan” in place.

According to the report, advisors who are within two years of retiring show about the same low level of succession planning adoption as those who are up to 10 years away from stepping down.

This is why Brie Williams, head of practice management at State Street Global Advisors, urges adivsors to start preparing for succession today.

“It’s not a question of if, but a question of when,” said Williams, during a visit to ThinkAdvisor’s office. “Because exiting the business, ultimately, is going to be a reality. It’s a certainty. So [advisors] really need to spend the time evaluating what they want and what they need to do to put that plan into place.”

Depending on what succession path an advisor takes – whether an internal succession, a merger with another firm or an outright sale of the business – the process can take a minimum of 18 months to 5 years to put into place.

It typically takes a minimum of five years to identify and groom an internal successor, and in the case of a sale, it usually takes at least 18 to 24 months to find an external buyer, negotiate a deal and execute the transition.

If an advisor would like to retire by age 65, then they should start planning for their succession at age 50, Williams told ThinkAdvisor.

Having a succession plan is “simply just good business,” she said.

“This should be a part of your strategic framework as you’re considering how you’re managing the wealth transfer,” Williams said. “That’s already in motion now and will extend over the next three decades. So you could be much younger than 50 and consider what your continuity/succession plan is.

I would be a proponent of encouraging earlier rather than later.”

The report lays out five steps to help kickstart the process and lay the groundwork for a successful succession plan:

Have a Practice Valuation Performed

1. Have a Practice Valuation Performed

A practice valuation by an independent third party is an important first step in the process, SSgA says.

Williams said this can be “an eye opener.”

The valuation process can uncover weaknesses in the business and help owners direct their efforts toward maximizing the practice value before the succession takes place. A practice valuation also serves as an important point of reference for negotiations with either internal or external buyers.

“It helps you get a handle on where you might need to shore up some weaknesses so you can really truly get the value you’re looking to secure,” Williams told ThinkAdvisor.

Consultants across the industry recommend that advisors aim to complete a valuation at least five years before they plan to transition the firm, according to the report.

 Focus on Client Retention

2. Focus on Client Retention

Client turnover during transitions can be a major issue, according to the report.

The report states that one in three buyers reported that the acquisition resulted in a client retention rate of less than 50%.

To ease internal or external transitions, SSgA advises proactive and consistent communicatation with clients. This will help keep them engaged and help reduce the likelihood that they will move their accounts to another firm.

“Knowing what lies ahead – that predictability to some degree – provides confidence and builds loyalty both with clients and your employees,” Williams told ThinkAdvisor. “Again, that takes time as well. You can’t rush that.”

For internal successions involving sale to a junior advisor, the report says advisors should start to take a lead role in client meetings, in order to earn clients’ trust.

“If you are choosing to bring on some new talent to your team, junior advisors, you’re going to want to work them in thoughtfully and give them the chance to develop,” Williams said.

In the case of an external sale, the report says that selling advisors should collaborate with buyers to make sure clients have continuity in their investment management, product selection and service levels.

Connect With the Next Generation of Clients

3. Connect With the Next Generation of Clients

Advisors must capture a broad client mix across age ranges and build multigenerational relationships with their clients’ families.

The report identifies what next-generation investors are looking for in an advisor. Research shows that next-generation investors place a far higher premium on information, transparency and convenience than do older clients, according to the report.  

The report finds that younger investors also value face-to-face contact and have a more collaborative planning style. According to the report, they expect information delivered in real time and a holistic, goals-based approach to wealth management.

“Truly knowing who your client is, what their values are as an individual investor will help you help them achieve their goals,” Williams said.

Attract Next-Generation Advisors to the Practice

4. Attract Next-Generation Advisors to the Practice

Attracting young, skilled talent into advisory firms can be a “really critical step as part of the succession plan overall for the future of the firm,” Williams said.

Bringing on younger advisors is a strategy that many are turning to, but there’s still work to be done on an industry-wide basis.

According to the report, only 21% of advisory firms surveyed have hired younger advisors in an effort to connect better with the next generation of clients.

“It really helps to get [younger advisors] involved in every aspect of a client meeting,” Williams said. “It shows that they’re a part of the financial advisory team, even if they’re growing into a larger role.”

It’s also important to know what these next-gen workers are looking for in regards to their career path, Williams said.

“Mapping out a three- to five-year plan of goals and expectations on both sides of the table is important,” she told ThinkAdvisor. “An advisor needs to be a manager as well.”

Consider the Emotional Aspects of Succession

5. Consider the Emotional Aspects of Succession

One reason advisors are often not eager to get started on a succession plan is that they must evaluate not only their internal teams, but themselves as well—an exercise that can be challenging at best, the report says.

“It’s an emotional process that can be because most of them have been building this business for their entire career, and it can be a barrier as to why they don’t get started,” Williams said. “It requires them to take a look in the mirror at their own strengths and weaknesses when they start to evaluate what’s the right option for myself, my family and my business and my team.”

By doing this, advisory firm owners can get a clearer perspective on the talent gaps that need to be filled before they retire.

As the report states, a successful transition can also require founders to step back and hand control of their firm over to someone else.

“A lot of that hesitation can be driven by fear,” Williams said. “Change isn’t easy for almost any one of us.”

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