The study found that among the advisors who do have a plan, 26.6% said they were going to sell to an existing advisor in the same practice, 19.1% said they would groom a junior advisor or family member, 14.4% said their clients would be reassigned by their firm, and 13.8% said they’d be looking to sell to an outside buyer.
When evaluating potential successors, the study participants—whether they had a plan or not—said the personality of the acquiring advisor (88%), the ability to put client interests first (85%) and a clean regulatory/compliance record (85%) were the most important factors when considering a successor.
According to the Cerulli, developing a successor can take time, usually five to seven years of training, and the successor should go through a full business cycle and market cycle before they’re considered ready.
“Even drawing up a rough outline of what your succession plan should look like is a big step forward,” Smith said. “And just like planning, over time you can add one more thing on to make it more robust. So in years one through five, you meet with other advisors often, get to know them, find out if they’d be a good fit.”
After that, agreeing what “retirement” looks like, whether it’s a clean break after a period of client adjustment or ongoing reduced hours where the selling advisor only communicates with their top 50 clients and acts as an interpreter with the incoming advisor, can allow for a sense of retained value even after stepping away from daily task, he continued.
“What most advisors want is to know that their family and their clients are going to be taken care of,” Smith said, adding that the importance of transition insurance cannot be overstated. “Getting experts involved is very important. You can ask your broker-dealer or custodian, ‘Who are the advisors who look like me? What’s possible?’”
The path of least resistance, Smith said, is finding someone on the same platform, with similar clients and with similar ideals. “The independent broker-dealers are one of the best resources for that.”
And when pursuing internal succession, shared equity ownership and transparency are two culture traits that mean a lot. “Communication with the next generation of advisors is essential to retention, and it is important to recognized that talented advisors will only wait so long for ownership opportunities to come to fruition,” the study found. “To facilitate the sale of equity ownership, it may be helpful for firms to secure financing mechanisms to assist the next generation of owners with acquiring their equity interests, as many may not have the resources to pay out of pocket.”
Those sources of financing can be the selling advisor or involve loans from platform partners such as independent broker-dealers, custodians, banks, or private equity firms.
The task of succession planning can be daunting, Smith said, adding that getting off the starting block is often the hardest step.
“No one finds time for this unless they make it a priority,” he said.