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.
The most at-risk group with no succession plan was sole proprietors, those with $150,000 to $500,000 in revenue, TD found. Further, they are at increased risk no matter their age “because if something should happen to them tomorrow, no one is there,” she says.
Steps to take
The mindset has to change with reluctant owners, from “stop searching for The One, and instead start thinking about [succession] as a human capital strategy,” Oligino says. She points out that firms should push plans to grow larger and think about new hires. “Over the course of time as you build your team, you’ll naturally end up with a pool of successor candidates.”
Beyond this, firms should plan for backups to business-critical roles, such as a lead advisor or COO. “If one of the top revenue-generating advisors goes out on a long medical leave, how long will it take to replace that person?” Oligino says. Of respondents, 65% said it would take them six months to replace that role. “So if a top revenue-generating advisor is out of commission, or they leave the firm, it will take six months to replace. That’s six months that revenue is not there.”
Most advisors (80%) cited character, values and shared vision as the most important evaluation criteria for ownership. Mentoring also was important to them, says Oligino; therefore, selling the firm to an aggregator or another firm didn’t have that draw. “What we heard from those who chose internal succession as a preferred solution is because they built their firm and they love it,” she explains. “One advisor said, ‘It’s like my baby, and I want to mentor someone who will love my baby like I do.’”
Advisors may have one hurdle while finding the right successor, at least from the millennial generation: 62% don’t even know what a financial advisor is, many lack the high risk tolerance required for ownership, and many are looking for different career paths than previous generations, according to the study.
A good place to look for talent, both for hiring as well as for successors, is through Financial Planning Association chapters, or “centers of influence,” like CPA groups, that can make referrals. Oligano adds that many advisors are in study groups in which they have developed potential successor relationships. She says advisors should “think about [succession] differently so it doesn’t seem so hard. You’re not looking for a needle in a haystack, you’re just looking for next best hire who has potential to be more in the future.”
In addition to its findings, the 37-page study, currently only available to clients, includes case studies and check lists that can help guide advisors through succession plans.
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