Less than one in three, 27%, of financial advisers have a formal succession plan, according to a new report, “The Succession Challenge 2018,” issued by the Financial Planning Association (FPA) and Janus Henderson Investors. Forty-one percent have some sort of succession plan.
For those within five years of retirement, 40% have a formal succession plan, but for those within five to 10 years of retirement, the figure drops to 34%.
Advisers in larger practices are more likely to have a formal plan, with 60% of advisers in firms with $500 million or more in assets under administration (AUA) having one. Among firms with less than $50 million, a mere 13% have one. Succession planning also tends to focus more on the value of the business than the transition of the business, with 72% saying their plan includes a goal for the value of the business. Sixty-one percent have a plan that includes information on the client transition process, 57% with information on the workload transition process, 56% with information on the timeframe for the transfer process, and 41% with information on the team transition process.
However, for advisers in practices with 10 or more team members, 67% have formal succession plans that include information on the team transition process. For those with fewer employees, this is true for only 47% of advisers. Among those with a formal plan, 39% worked with an outside consultant to create it, and 18% worked with someone in the broader organization, i.e. their broker/dealer (B/D).
Only 28% of advisers say they feel very prepared to transition the business. For those in larger organizations, this is true for 89% of advisers.
Among those advisers without a succession plan, 44% say their practice faces significant risk, and another 41% see some risk. Forty-nine percent of advisers without a succession plan say finding a successor has been a challenge, followed by finding a successor who can fund the purchase (29%) and knowing what to put in the plan (29%).
Ninety-seven percent of advisers without a plan say they will create one. Among team members, 16% say they do not know when the adviser they work for will retire, and another 11% say they do not think the adviser will ever retire. Ninety-six percent of team members say that not having a plan is a risk, and 88% say that a transition will have a significant impact on them. Among all advisers, only 11% say they are clear on when they will retire, and only 29% are somewhat clear. For advisers who have a succession plan, 22% are clear on when they will retire and 35% are someone clear. This drops to 4% and 21%, respectively, for those advisers without a plan.
When it comes to valuing and transitioning the business, 61% of advisers have a goal for the value, and 48% used a recurring revenue multiple to calculate that goal. Sixty percent of advisers say they are on track to meet that goal; another 15% say they are ahead of meeting that goal. Nine percent say they will sell the business to a senior adviser on the team, and 28% say to a junior adviser.
In conclusion, the authors of the report say, “Advisers need to invest time and effort in mapping out a plan to transition their business. The white papers that will be developed based on this research will provide actionable steps to make that happen.”The full “Succession Challenge 2018” report can be downloaded here.