Succession Planning a Complex Affair

Accurately tracking practice metrics and documenting operating procedures are two ways firm owners can build value during the succession planning process.

More than three in 10 financial advisers (32%) in the U.S. plan to exit the business over the next decade, analysis from research and analytics firm Cerulli Associates shows. The uptick in retirement, researchers say, is already putting a burden on firms to develop and enact succession plans and client communications strategies to avoid asset losses and operational disruptions.   

“Finding a suitable succession partner can be a major hurdle that frustrates advisers early in the process,” says Kenton Shirk, an associate director at Cerulli. “It can take a year or longer to fully execute a succession plan.”

Steps in enacting a succession plan, beyond identifying a successor, include conducting extensive due diligence, developing and striking a favorable business deal, and finally executing a transition of fiduciary authority—and the timeline is often much longer for those grooming an internal successor, Cerulli says.

Options for firm owners to consider when entering retirement include selling to an existing partner, external buyer, institutional buyer, or junior adviser. Once a viable candidate is found, the adviser then needs to conduct a deeper evaluation. This examination includes determining whether the buyer is able to finance the deal, has the capacity to assume more client relationships, and has a clean regulatory record, Cerulli says.

Tracking practice metrics that are important to buyers enables an adviser to enhance value proactively prior to a sale. Many key metrics relate to future cash flow potential, a key driver for valuation. Buyers, Cerulli says, often want to know whether there are a significant number of small clients who are unprofitable to service, a heavy concentration of older clients, or a small and inconsistent growth rate.

Cerulli says streamlining operations and technology is another way that advisers can actively enhance their firm’s value and ease the transition process. Analyzing and documenting procedures, for example, decreases dependence on the current owners. Adding thorough client notes to customer relationship management records helps a buyer assume relationships faster, Cerulli says. Certain buyers and sellers may even synchronize customer relationship management systems, reporting systems, or other technologies to minimize transition barriers.

Shirk adds that creating a successful succession plan involves more than deciding a price or who is going to fill vacant roles at a firm. Clients and staff are often uncomfortable raising important questions about succession. To fight this, Cerulli encourages advisers to proactively communicate their future plans with key stakeholders long before they plan to retire. Advisers may introduce clients to their future successor to build rapport and smooth the transference of the relationship.

“It is important not to overlook emotional hurdles, as these frequently sidetrack succession,” Shirk says. “Some advisers struggle to hand their client relationships to someone else.”

Cerulli’s assessment in the first quarter issue of The Cerulli Edge – Advisor Edition lines up with other recent research on the subject of adviser retirements. For example, Carson Wealth Management Group finds in a recent study that just 7% of wealth management firms have an actionable succession plan in place, should the firm’s principal become unable to work (see “Come On, Advisers, Look at Your Own Future”).

Whatever the obstacles to putting a succession plan in place, Cerulli recommends that advisers start by thoroughly envisioning their retirement before jumping into the planning process. This will help advisers identify how they can maximize the benefits for both their business and their clients, researchers say.