More Advisors Thinking About Succession Plans, Surveys Show

From the “do as I say, not as I do” category of investment advice, several surveys have shown that a significant number of financial advisors themselves have no plans for succession.

This may be particularly urgent since a two-year-old J.D. Power report found the average age of financial advisors was 55, and about one in five financial advisors was age 65 or older.

“Although financial advisors expertly help clients plan for their future, they sometimes neglect to apply the same forethought to their own firms,” concludes a new survey by SmartAsset Advisors.

Some progress has been made in this area over the past few years. A 2018 report by the Financial Planning Association found only 27% of financial advisors had a succession plan or any formal preparations to transition their business. SmartAsset’s new survey of more than 460 financial advisors showed the number of those with succession plans has increased.

“Our findings align closely with the 2018 FPA report that said 27% of financial advisors have a succession plan in place for six or more years,” the SmartAsset report said.

However, the survey additionally found that 38% of advisors implemented a succession plan in the last several years. Thus, roughly two-thirds of financial advisors (64%) now have a succession plan. Most of those without a succession strategy, about 56%, said they plan on creating one at some point in the future.

Still, financial advisor succession planning is not top-of-mind for most clients, the survey reported.

“Although the lack of a financial advisor succession plan poses a potential risk to clients, only about one in four financial advisors say that clients ask about their succession plan,” SmartAsset said.

Lack of succession planning is an issue that has dogged small and family-owned businesses for years, according to the Family Business Institute.

“The current state of ownership succession planning among family businesses is decidedly mixed,” the institute said. “About two-thirds of family business owners report a good understanding of the amount of estate taxes due upon their deaths, but about one in five has no estate planning at all. More than one-third of junior generation family business members has no knowledge of the senior generation’s transfer plans.”

Ownership succession planning issues that seem to be the most common areas of contention or omission in business succession planning are: 1) Technical mistakes, 2) Planning in a vacuum, 3) Leaving the business to the surviving spouse, and 4) The challenge of treating children equitably.

The numbers are similar for businesses in general.

“By waiting too long, an owner runs the risk of not having the right people in place to run the business and limiting tax planning options for the business and their personal estate,” said a December 2021 report from Michigan business law firm Foster Swift Collins & Smith. “Either misstep can cause a business to fail when it passes from one generation to the next.”

An exit that is too fast or without direction can leave a leadership vacuum and damage relationships with existing clients and customers, the attorneys warned.

“Crafting an effective succession plan usually includes a team of attorneys, accountants, financial planners, and often a business consultant,” Foster Swift said.

The SmartAsset survey found that most advisors plan on an “internal succession,” passing the business on to someone currently working at the firm.

“Almost 71% of advisors who have a succession plan intend on passing their business on to someone at the firm,” the survey said. “Another roughly 11% of advisors plan on passing their business to a family member. In contrast, less than 9% of financial advisors plan on selling their business to another firm.”

Most advisors surveyed said their plans were largely unaffected by the pandemic.

“One advisor said that with the threat of COVID-19, they must consider what happens to their clients and revenue in a worst-case scenario,” SmartAsset reported. “Others note their desire to benefit from the hard work they put in over the years, and with that in mind, it is important to have an exit strategy.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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