Many Advisors Neglect Their Own Succession Planning

By Cyril Tuohy

InsuranceNewsNet

Financial advisors who worry that investors pay too much attention to the accumulation phase of wealth creation to the detriment of the payout phase, ought to consider their own shortcomings when it comes time for professional “drawdown.”

It turns out that advisors, so used to planning the lives of others to ensure assets are passed on to heirs with as few headaches as possible, aren’t that good at planning their own successions.

That means two parties suffer: advisors themselves and their clients.

“If you don’t have a plan in place, you can go into decline mode and you’re not serving clients well,” Tom Karsten, president of Karsten Advisors with offices in Texas and Colorado, said in an interview with InsuranceNewsNet.

Are advisors simply too busy to bother with the “afterlife” of their own practices? Or is it that advisors, many who work as sole proprietors or with one or two other part-timers, haven’t thought much about their exit strategies by grooming a successor?

Brian Heapps, president of John Hancock Financial Network, said more needs to be done to help advisors make the transition, even as the industry hasn’t been shy about discussing the issue.

“Personally I can see that advisors might consider a succession event to be too far into the future to consider,” Heapps said in a news release. “However, it's never too early to work on the critical first steps of obtaining a solid valuation for a practice and then considering how best to increase the value and build equity."

According to a survey earlier this year by Matthew Greenwald and Associates for Signator Investors, 56 percent of advisors have a business continuity plan in case they are unable to work, but only 11 percent have completed a succession plan.

A total of 34 percent said they started a plan but have not completed it, the survey also found, and only 10 percent have an accurate value of their practice.

Building a business is to advisors what the pay-in phase of a retirement is for a salaried employee, and neither group appears to have planned for life beyond the payout phase. After spending more than 30 years building their business, advisors are unsure about how to take it apart.

And with good reason, said Jason Del Col, senior vice president of United Capital in Newport Beach, Calif., because succession planning is far more nuanced than simply handing over an advisor’s book of business.

There are two pieces to the equation as far as retiring advisors are concerned: The first is to ensure that the advisor is “retiring” in the way he or she wants. Often, the veteran advisor doesn’t want to leave the industry in one swoop. Instead, many advisors prefer to transition into retirement over a period of several years.

The key is to provide the appropriate “landing” pad for a departing advisor. This may mean a part-time schedule, where he or she can still come in to work once or twice a week. It may also mean having a successor firm take care of the back-office and compliance burdens.

Many retiring advisors still want to continue generating income, even if it’s not quite as much as they used to make, as they move deeper into the “drawdown” period of the transition. Thus, it’s important for a successor firm to evaluate an advisor’s book of business fairly.

Del Col said the second issue to worry about is for the retiring advisor to find a successor who will understand a client’s needs. That requires an “honest conversation” between the old advisor, the new advisor and the client.

With so many advisors putting their clients’ needs ahead of their own, only an in-depth discussion will give the old advisor satisfaction that long-time accounts will be taken over by the right advisor, Del Col said. “They are transitioning their life’s work, and this is the last deal they will ever do and that’s a big deal,” he said, in an interview with InsuranceNewsNet.

Sole practitioners may average approximately 200 clients, but it’s how the new advisor fits in with what clients want that locks in a successful transition.

Opportunities abound for advisors to buy and sell their businesses, particularly at the smaller end of the spectrum, and the same trend affecting baby boomers – mass retirement or semiretirement over the next 15 years – is affecting advisors also, Karsten said.

There aren’t enough younger advisors to step in and replace retiring ones, yet demand for advice is going up. That means a selling opportunity for advisors looking to retire, and a buying opportunity for advisors looking to take on more business, Karsten added.

Karsten said that as a rule he only considers buying advisors who’ve been in the business more than five years. “Also, if there are any key employees, make sure they are committed to come work for you.”

The business of a sole practitioner will typically sell for anywhere from 1 to 2.5 times revenue depending on whether it’s commission based or whether it’s a fee-only practice, he said.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].