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:
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.
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.”