Where’s the Succession Plan?

Two-thirds of advisers lack succession plans, Fidelity Institutional Wealth Services found.

While this is an improvement from the 2011 Fidelity RIA Benchmarking study, where 75% of participating advisers reported having no succession plan, it’s still inadequate for an industry with an average age of 52. The 2013 study also found that more than half of firms who participated in the survey (55%) have not changed their approach or readiness for succession for the past three years.

To help registered investment advisers (RIAs) accelerate their path toward succession planning, Fidelity is providing access to “Succession Ready,” a business continuity program. Offered by the consulting firm MarketCounsel, the program gives Fidelity’s RIA clients a turnkey program at a reduced rate. The “Succession Ready” program aims to put some certainty around the unexpected, such as an adviser’s death or disability.

“While there is no substitute for comprehensive succession planning, we recognize that for many RIA firm leaders, this longer-term planning is a process that requires time,” said David Canter, executive vice president and head of practice management and consulting at Fidelity Institutional Wealth Services. “Yet there’s a need for advisers to put back-up measures in place immediately. Our goal is to encourage advisers to establish business continuity plans – even before their succession plans – so they know their clients and their business are taken care of in case of an emergency.”

The program gives advisers three critical documents commonly used to create a contingency plan:

  • Limited power of attorney outlines a temporary plan if something happens to the principal who is then unavailable to run the firm. This ensures the firm can continue to operate and serve clients;
  • Buy-sell agreement specifies who will acquire an adviser’s business or clients if the principal of the firm is permanently disabled or passes away, and contains provisions addressing valuation, payment of the purchase price and closing terms; and
  • Operating/shareholders agreement review provides a detailed review of these agreements to ensure they include provisions that address both the temporary and permanent unavailability of one or more partners or principals.

Developing a Plan

Effective succession planning is becoming even more important to make sure current business owners hand over control to others in a way that is least disruptive to their firm’s operations, clients and long-term value.

Another succession resource from Fidelity is “Developing a Plan to Transition Your Business to an Internal Successor,” a guide designed to help firms develop an internal transition plan. Six steps to help lead to a successful internal transition are outlined.

A focus on internal transition is critical, as the 2013 Fidelity RIA Benchmarking Study found it is advisers’ preferred succession method. More than half of advisers surveyed (57%) want to transition their firm to someone internally, compared with 11% wanting to merge with another firm and remain involved, and 14% wanting to sell their firm and exit the business. These findings are in line with the informal surveys Fidelity has conducted at succession planning workshops across the country, which also found that the majority of those who want an internal transition have not yet identified a successor.

 “We have found that prudent business continuity planning creates a logical bridge to begin the dialogue on succession planning,” said Brian Hamburger, president of MarketCounsel. “Looking at the issue from a practical scenario, the unavailability or sudden loss of key personnel makes the issue real. It’s a genuine business concern that advisers feel called to take on to protect their clients, employees and families. Advisers can begin to envision that without having to take on more difficult scenarios, such as their own death.”

The 2013 Fidelity RIA Benchmarking Study was conducted by Fidelity Institutional Wealth Services, a division of Fidelity Investments.