Transferring ownership of one’s advisory practice is never easy. There are innumerable considerations in preparing for a transition that will be smooth, maintain a high level of client satisfaction and enable the business to retain its value and continue to grow.

When family is thrown into the mix, such matters can become even more complicated. While it may be comforting to imagine—when that fateful day arrives—you can simply hand over the reins to your son or daughter and let the next generation take charge, it’s rarely that simple. Moreover, a lack of sufficient forethought may be dangerous to your financial health and to your family’s well-being.

While everyone’s circumstances differ when planning a succession involving the next generation of family members, here are some top considerations to help you avoid the worst potential pitfalls:

1. Are the perspectives of parents and children aligned? An advisor thinking about relinquishing control may have a very different vision of the future than the child assuming it. Whereas, for instance, an advisor may imagine his life’s work expanding under his child’s direction to become an empire rivaling the next House of Rothschild, the child may view the business as a convenient means to earn a comfortable income that will enable him to take long vacations and sail around the world. Or, while the child may be champing at the bit to introduce new ideas and innovations to the ways in which the business has been run, the parent may bristle if business isn’t conducted exactly as before.

As such, there is no substitute for extensive communication between the two generations. There will inevitably be a process of give and take, as well as surprises. Getting these issues out in the open early and often will go a long way in heading off conflict.

2. Is ample time allotted for the transition process? Ideally, a transition mustn’t be rushed. The child (who may already be in his forties or fifties) needs sufficient time to fully master the business and assume ownership of the client relationships. Parent-owners cannot assume their heirs are prepared to step into their shoes without a process—often as long as ten years or more—of working together and slowly transitioning from one generation to the next.  

Additionally, a long lead time will enable the heir to develop his or her own clientele as well as taking over the parent’s. Since the parent’s clients will tend to be older, enabling the child to develop his or her own client relationships will help the business ensure sustainability well into the future.

3. Is the heir well-suited for the job?  Above all, a parent must ask whether the child has both the passion and the aptitude for running and building the business. Is the child taking over merely out of a sense of obligation? Or is the business going to an individual truly well equipped for the profession and excited about their career? If not, it may be in everyone’s best interests—as hard as it may be to admit—to sell the business to an outsider and enable the heirs to inherit its monetary value instead. Building and running a business while also serving as a financial advisor is a difficult job that takes unique talents. Finding someone who can do both is a herculean task. Be open and honest with yourself in the assessment of your heirs and their strengths; maybe they are better served as a lead advisor with an ownership stake in the business, but not leading the organization; maybe they are better served as the owner (visionary/rainmaker) and not the advisor. This analysis and honest reflection should occur before any plan of transition is developed.

Often, it is wise for a prospective heir to spend several years outside the firm, preferably elsewhere in the financial services industry, before coming to work at the family business. This will enable them to test their skills and bring new and alternative ideas into the firm. 

Indeed, founding advisors should not be afraid to enlist their existing clients’ help as a type of “review board” for their prospective successors. No matter how confident a parent may be in his or her child’s business acumen and skill as an advisor, if the practice’s existing clients see shortcomings in the successor’s abilities or approach, this may constitute a serious red flag that should not be ignored.

4. Is the transaction properly structured? Importantly, the transfer of control should be viewed as a transaction, not as an inheritance or a gift. As such, it should be structured with an objective valuation and at arm’s-length remove. Once that is established, however, there are many creative ways the transfer can be structured. Rarely are family-owned businesses bought out at once, but rather are structured over time. This allows the parent to continue working and gradually decrease his hourly commitment while steadily monetizing the value of his interest to fund his retirement, without placing too great a financial burden on the successor. Enlisting the input of your broker-dealer or an expert in advisor succession planning is invaluable. 

5. What about the siblings? Finally, the interests of those family members who are not taking over the business must also be considered. In general, not all children will choose to enter the family firm, but they all have a stake. Moreover, a ceding advisor should bear in mind the dangers inherent in transferring the business to the child who is simply most in need of a job, rather than to the child who may have a successful career elsewhere and is therefore not interested in taking over.

This again argues for the value of an objective, arm’s-length transaction, in which monetary value can be fairly apportioned among family and heirs according to agreed-upon criteria. The last thing parents want is to create a situation that will sow dissension among their children after they are gone.

In today’s economy, where competitive, rewarding jobs can be hard to come by, a healthy family-owned business, which can offer not only sustenance for the current generation but potentially for additional generations to come, is a highly desirable possession.

There is a lot to consider to make an intergenerational transfer work well. But when done right, there is much to be gained.

Jeffrey Rosenthal is president and CEO of Triad Advisors, the hybrid advisor-focused independent broker-dealer.