In 2018, the Financial Planning Association partnered with Janus Henderson on a study that showed 73% of financial advisors did not have a written succession plan in place, and of those who were within five years of retirement, 60% did not have a succession plan.
Not much had changed from a similar study in 2015 by the FPA and CNBC, and the same can be said for today, noted Gabriel Garcia, managing director of advisor client experience at E*TRADE Advisor Services.
“It’s an important topic that has been discussed and written about for the better part of the last two decades, and unfortunately it has not gotten the due attention,” Garcia said. “I think the expectation has been that as the demographics continue to age this would become more important,” he added.
He noted the advisor population is a mature one with an average age of 55, of which one-third are over 60. “There is a horizon in front of professionals that says you need to think about succession,” he said.
Garcia added that succession is a tough concept for advisors to think about because most of them associate it with mortality. “If you think about the construct, they are small entrepreneurial businesses that these individuals found and have built from the ground up in many respects, and it’s their passion. It’s the driver of who they are,” he said.
But succession planning should not be thought of simply as an exit strategy to sell the business and get out, Garcia said. Rather, advisors should build it around a growth strategy that builds a business that lasts for future generations.
Furthermore, Garcia said, too many people think about succession as a monetization of the value of the firm. But if they get the mindset of thinking about it as creating an enduring firm that serves clients, as well as providing a livelihood and a profession for the employees, that is a different approach to successful succession.
Garcia offered that the pandemic is an opportune time for advisors to think about succession planning. “Not to cast a dark cloud, but certainly the prospect of something happening in the current environment is statistically greater than they were before,” he said.
“If you think about your clients and your employee and your family, not having a plan in place is a fatal flaw,” Garcia said, noting that he has seen cases where the family of an owner and the estate were dealt an unfortunate circumstance.
Additionally, Garcia said, not having a plan in the face of an emergency could diminish the largest asset that an advisor owns.