Financial advisors need a succession plan to benefit clients and their own firm

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The aging army of independent registered investment advisors who have spearheaded the growth of the financial planning profession need to follow their own advice when it comes to their businesses — for their clients’ sake, as well as their own.

With the average age of financial advisors somewhere in their mid-50s and a big bulge of advisors now in their 60s and 70s, the fate of thousands of practices and millions of clients in the next decade remains in doubt.

Studies show that most small advisors — particularly solo practitioners — have no successor to fill their shoes, nor very good prospects for selling their business to someone else.

The reality is, they probably never will.

“The No. 1 way that independent advisors exit the industry is through attrition,” said David Grau, president of consulting firm FP Transitions. “They don’t spend on technology and they don’t market themselves.

“When they finish their careers, there is nothing left of their business to sell” or pass on, he said. “It’s a terrible reflection on the industry.”

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The situation, however, is getting better, according to Grau.

He divides the smaller end of the independent financial advisor market into two buckets. Solo practitioners generating about $250,000 in annual revenue who are happy to manage assets and do financial planning for clients they’ve grown up, typically have no succession plan. Grau says they represent about 70% of the industry.

The slightly bigger practices are in better shape. They may have employees and lease office space. Their infrastructure suggests they could continue on as a business if the owner died.

“When [solo] book-owners become practices, that’s when they start thinking about succession planning,” said Grau, who performs about 800 valuations of advisory practices annually. “Their practice is the most valuable asset they own.

Most of them don’t want to sell but they realize they need to do something,” he added. “That’s when they get serious.”

Advisor Mark Pitre, principal at California Financial Advisors, in San Ramon, California, said the issue came into focus for his firm five years ago when one of four partners had to take a year off for health reasons.

“We realized we had a capacity problem with our business,” said Petrie, whose firm ranked No. 7 on the CNBC FA 100 list of top advisor firms for 2019. “The four of us can only manage so many relationships.

“None of us have the goal of walking away in the next 10 years, but we know we need to develop young advisors for the practice to live on after us.”

To that end, the firm started an internship program, bringing in two or three college-age interns every year to get a feel for the business.

“We have them sit in on client and investment meetings to expose them to what goes on at an advisory firm on a daily basis,” Pitre said. “We’re fortunate to have found 2 people out of about 40 so far that we think are ideal for the firm.”

Succession planning is also about growing and improving your business. Advisors have to take a step back and determine how they can achieve more scale and improve their business.

Alois Pirker

senior analyst at Aite Group

Dale Brown, senior executive vice president of Salem Investment Counselors, the top-rated firm on the FA 100 list, has also been focused on succession planning for the last five to 10 years.

“We want Salem to exist for another 40 years,” said Brown, one of five partners at the firm. “We’re bringing in qualified young people and the firm will pass to them.”

Brown says Salem doesn’t typically hire people out of college but looks for candidates with more experience. “Most of the young people that come to us are career-changers in the their early 30’s,” said Brown. “We ask them for a commitment to a career with Salem.”

While Brown says the terms of advancement at Salem aren’t set in stone, partners regularly communicate with younger employees at the firm about their futures. “There are no promises but people who join Salem understand that if they perform as anticipated, they’ll know what to expect down the road,” said Brown.

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He also stresses the importance of talking with clients about the firm’s succession plans. “Our clients typically have contact with four or five different people at the firm and we talk to them about succession planning,” he said. “It’s important they understand that if I don’t make it into the office tomorrow, they’ll be fine.”

Finding and developing successors for a business doesn’t come cheap — one reason so many small advisors have failed to act. However, advisors simply can’t afford to ignore the issue, said Alois Pirker, a senior analyst for Aite Group focused on registered investment advisors.

“Succession planning is also about growing and improving your business,” Pirker said. “Advisors have to take a step back and determine how they can achieve more scale and improve their business.”

Unfortunately, many have waited too long to get an objective valuation of their business and to take steps to either pass it on to a successor or to sell it to another advisor.

“Unless you start succession planning early, it’s hard to pull off successfully,” said Pirker. “I think many advisors just don’t know what to do or whether it’s worth doing anything now.”

That suggests a lot of disappointment and anxiety for both financial advisors and their clients down the road.

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