It’s hard. That seems to be the main advisor response when asked: Why don’t you have a succession plan? Puzzled by this answer, TD Ameritrade decided to delve into the reasons behind this response, hoping to help more advisors move past the hurdle to shore up a plan.
In its white paper, “Succession Planning: Beyond Ownership Transition, It’s a Smart Human Capital Strategy,” TD Ameritrade found several reasons advisors run from the altar or even skip the ceremony on their way to planning for the future.
“One of the reasons we did this research is to find out why it is so hard,” says Vanessa Oligino, director of advisor business performance solutions for TD Ameritrade Institutional. “It’s highly recommended by the SEC that [advisors] have a succession plan [and] it makes good business sense, so why haven’t they done it?”
The study found that 66% of the firms interviewed did have a succession plan, however only 37% of those indicated it was an adequate plan. Further, those with a succession plan preferred an internal successor by 80%, while 9% planned to sell to an external buyer and 6% planned to merge or acquire another firm. Only 1% stated they plan to close the firm.
“Ironically, this industry is one that specializes in preparing its clients for major transitions, yet advisors aren’t following their own advice,” TD writes in the paper. “In our focus groups, we learned that advisors are in many cases aware of the benefits of succession planning but, for a variety of reasons, can’t spring into action.”
Key reasons cited for this reluctance included 33% that were concerned clients wouldn’t be adequately cared for after succession, 31% felt there’s no need as they aren’t retiring soon, 25% felt a successor wouldn’t do a good job, and 25% cited they weren’t sure how to realize the full equity of the firm.
No one’s perfect
One problem, Oligino notes, is advisors are searching for “the perfect successor.” But “perfection” comes hard. “Some people have this vision and can’t see outside it if somebody doesn’t meet all of the criteria, but there are possibilities [with] a different person they hadn’t thought of,” she says.
Another reason for the procrastination is setting up financing. However, even this shouldn’t be an issue, Oligino says, as advisors can hire lawyers and tax professionals to put these contracts in place. “The problem is as [an advisor] is going through [a succession], there are emotions on both sides.” For example, the seller, who is transitioning some portion of the firm may grow reluctant to pass it off, and the successor may be nervous about making such a large investment. “There are a lot of jitters that go with that,” Oligino says. “Both sides of the transaction are feeling a lot of emotional angst and stress around it even though they both believe it is the right decision. On top of it you have lawyers behind it, and that’s often another reason why it can be difficult.”
TD also found advisors who didn’t move forward as they had tried before and were burned; in fact 46% said their first attempt failed. The 54% that were successful said it took on average four years to implement the plan.