Advisors who wait until they’re ready for retirement before considering a succession plan are waiting far too long.
That was the opinion of Philip Palaveev, founder and CEO of The Ensemble Practice and advisory firm practice management specialist, who spoke during the annual Advisor Growth Summit, held virtually yesterday and today. His session, "G2 – Building Your Next Generation," outlined the steps founding advisors should be taking to ensure a smooth transition that not just retains clients but also continues to provide growth for the firm in the years before passing the torch.
“We do a lot of things very, very well as financial advisors. Last year was one of the best years we’ve ever had in business. At this point in time, financial advisory firms are actually larger than they’ve ever been before, we have record levels of owner income, record levels of profitability, record valuations,” he said. “Unfortunately, as they say, the seeds of destruction are sewn in good times.”
Those seeds of destruction, he said, are the industry’s inability to attract, retain and develop the next generation of advisors and leaders.
“When we talk about the next generation, we frequently assume that’s just a succession process. Realistically, nothing could be farther from the truth,” Palaveev said. “It’s not a process where we can wait until we’re 60 and going to retire in five years. It’s a process that every business owner needs to get started as soon as they can, almost as soon as they start their firm.”
And the reason that founders need the next generation on board from the beginning is that the firm, hopefully, is growing.
“Advisory firms, particularly independent advisory firms, have been doubling in size every five to six years historically for the last 20 years,” he said, adding that there’s a formula for growth that ensures coverage for clients and room for business development. Every time a firm adds 100 clients, it needs to hire another advisor, he said. Every time it hires another six to eight employees, it needs to designate another team leader, and every time it adds another million or two in revenue, it needs another owner.
“As we double in size, we need people who are capable of taking care of clients, capable of creating systematic growth, capable of providing management and leadership, people who are capable of being mindful, thoughtful investors in the firm,” he said. “That’s why we need the next generation.”
So how will that break down across a firm?
Ideally, Palaveev said, there will be a strong and committed leader in every function—strategy and management, advisory, investments and operations, a partner or owner for every $1 million to $2 million in revenue, a dedicated leader for every seven employees, and no single shareholder will account for more than 33% of the firm.