Independent financial advisors who are ready to retire often seek expert guidance on how to execute succession planning deals with younger advisors.
But independent advisors with family heirs to their business may not always feel the same need to connect with experts on how best to transfer their business to the next generation of their family. And this can lead to serious missteps.
Indeed, when family is involved, financials and business realities can take a back seat to emotions.
Even when passing a practice onto adult children or other relatives functions as an inheritance instead of a purchase that funds the seller’s retirement, the transaction should undergo the process of a rigorous business valuation, analysis of the client base, and consideration of where the succeeding advisor plans to take the practice in the future.
Furthermore, timing matters. Advisors who plan to retire in a year face different challenges than those who plan to retire in six years.
Similarly, advisors turning the business over to a single generation of heirs have different options than those who have heirs of multiple generations — for instance both adult children and adult grandchildren — who are ready to assume stakes in the business.
Here are three best practices for conducting multigenerational succession planning for an advisory practice.
1. Seek out consultants who can help create a succession plan that fits your needs.
If you and your family have either not thought out, or not openly discussed, every single option and contingency about passing on the practice, an expert consultant becomes vital. If nothing else, a consultant can provide an objective perspective on when and how the next-generation advisor should interact with staff and clients for smooth leadership transitions.
Depending on whether you have a long- or short-range window, consultants can offer different insights on how to build toward the transition. The longer the window, the more flexibility a family has in structuring the process, but that extended time frame also brings more potential for unanticipated changes in the priorities and circumstances of each party.
The shorter the window, especially for time frames under three years, the more the family needs a tightly defined transition process to which both parties adhere.
To this end, consultants should be able to facilitate workshops, mentoring and peer coaching for families involved in multi-generational practices. Workshops can incorporate training materials and feature noted industry speakers. Mentoring and peer coaching ought to bring together different families at various stages of transitioning advisory practices.
Mentors are best suited to detail successful strategies to those just beginning the process, while peer coaches are best suited to share their own challenges and responses during the transition process.
2. Strike a balance between professional and personal goals.