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Advisor Succession and Transition: What to Do; What to Avoid

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The great intergenerational transfer of wealth management has begun—and, as always, the realities are defying expectations. Advisors are not planning for themselves the way they do for their clients. As a result, they run the risk of diminishing the ultimate value of their firms. 

How do we know this? Our technology firm, Gladstone Analytics—a practice management and valuation application that compares a given firm’s performance to anonymized data on hundreds of advisor firms—enables us to take a pragmatic look at the trends and realities of succession planning. We recently completed our Annual Firm Review, based on data in Gladstone Analytics, and the respondents shared exactly where they stand on what should be a hot-button issue, considering that the average advisory firm principal’s age is 58. Here are some of the highlights:

  • 84% of firms have no formal interim continuity plan (in case of an unforeseen event)
  • Of those with an interim plan, only approximately 40% (or 6.4% of advisors overall) address disability
  • 52% lack a written Operating Agreement—and 89% lack an effectiveoperating agreement covering profit distributions, losses, and capital contributions, as well as exit provisions
  • 73% lack employee-retention mechanisms (employment agreement, non-compete/non-solicit)
  • Only 13% have seriously begun planning for a long-term transition (i.e., next generation)

Those who have had the great privilege of living to age 58 and beyond know that life events have a way of sneaking up on you. People have accidents; they get sick; sometimes they even die. Mortality is under our influence, but not our control.

This is meaningful to businesses, which need to be equipped to bounce back from owner setbacks or transition to new owners under unforeseen circumstances. Otherwise, the firm you worked so hard to build is vulnerable, and with it the wealth it creates for you, your partners and your family.

The sobering fact is this: every firm will transition at some point; it’s unavoidable. A lack of planning, however, jeopardizes the sustainability, viability and stability of a firm today. Without a succession plan in place, the transfer of responsibilities and ownership from one principal to another is likely to happen in an improvised manner, when, inevitably, someone becomes ill, loses cognitive ability or simply chooses to retire.

Should an accident happen, lack of planning dooms your firm to scrambling through disruption, rather than being able to smoothly shepherd clients through the changing circumstances at your firm. 

Making a Holistic Financial Plan—for the Advisor

During Gladstone’s ten-year operating history, we have worked with five firms whose owners faced a long-term disability and eight whose owners passed away unexpectedly. Sadly, these are the situations that cause the most damage to a firm, particularly when no plan for them is in place. These firms either went under or sold at a fire-sale price.

We have also worked with a firm that bought a book of business from an advisor’s widow, who got an unpleasant surprise when she learned that the value of her husband’s book greatly diminished after his death.

The frequency of these situations emphasizes a need for a holistic corporate plan – one that incorporates your growth plan with your continuity and transition plans. A holistic plan makes a firm resilient; it’s not that you won’t feel the pain of a problem, but you’ll be equipped to heal faster and more completely.

Bear in mind, not having a plan is a plan of sorts, though it’s usually a plan for the suboptimal. Think of continuity and transition planning as insurance for the business – you wouldn’t leave your family without life insurance or drive a car without adequate coverage. Why treat your business any differently? Protect what you’ve worked so hard to build; prepare for the unexpected – you, your firm, your clients, and your employees deserve that piece of mind. 

Strategies You Need 

No matter how large—or small—your firm may be, you should have an interim continuity plan in place that covers the death or disability of the firm’s principals. Ideally it should cover retirement as well. How elaborate the plan will be depends on the size and complexity of the firm.

For firms with less than $250 million in assets under management, there should be, at a minimum, a buy-sell agreement in place with a Practice Continuity Agreement. If the principals have identified internal successors, they can use Key Man insurance to fund the buyout. The key is to be thoughtful about defining disability. What should spring the agreement—inability to work after six months, 12, 18? What about diminished mental capacity—how would you determine when someone can no longer keep up with business?

We are working with a firm now that has five partners who want to write an agreement that lets them call out one another for mental issues. It’s an ensemble practice, and now one partner is losing his vision and wants to retire. They are negotiating how to buy his book. They have learned from experience how important an agreement can be.

Larger firms need more elaborate measures. We like our larger clients to have an Advisory Board, which can morph into a Board of Directors in case of untimely death or disability. We also recommend that these larger firms create a more institutionalized structure and have potential successors in place. These next-gen advisors should have employment agreements with first right of refusal to buy the former principal’s equity, in addition to a non-compete. The point is to prevent chaos and dissolution as ownership moves from one generation to the other. If the next-gen won’t or can’t buy in, the Board can approach outside buyers.

An important part of making a firm sustainable is making it resilient. Although one hopes never to need these plans, they are important. And for your more sophisticated clients, who may have created continuity and transition plans at their own firms, a strong plan will increase your value as an advisor.


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