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

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.