Not long ago, a study found that 40% of financial advisors were "ill prepared" to hand the reins of their practices over to a successor. But aren't advisors supposed to be experts in this kind of planning?
"Being a business owner is not an easy thing for an advisor," observes New York-based Amit Dogra, CEO of Third Seven Advisors. "It’s analogous to doctors being the worst patients."
That said, how exactly should FAs plan to transfer their practices when they retire? "Advisors typically believe they have more time until retirement" than they actually do, says Dogra. "So the key for many is to not wait until they’re ready to retire, but to start the planning process well in advance." (FA magazine is planning a succession planning workshop with leading experts for all advisors before its Invest In Women conference.)
How far in advance? The consensus is anywhere from five to 15 years. "This depends on the size of your practice and who your successor is going to be," says Ryan Wibberley, CEO of CIC Wealth in Rockville, Md. "The process will require less time if your successor is with your current firm, and your clients are familiar with the successor. If you transition to an advisor at another firm, this will take more time."
Making sure your clients continue to receive a good level of service is—or should be—the number one concern. "In this fiduciary era, you must put your clients’ interests first," stresses Todd Fulks, senior vice president of succession planning and business acquisition at the Advisor Group, headquartered in Phoenix.
"In fact," says Dogra, "the SEC has issued guidance stating that … having a succession plan is a fiduciary duty owed to your clients. So having your clients [be] part of your solution and aligned with your plans helps ensure both long-term and short-term continuity and compliance."
To that end, think of it more as continuity planning than retirement planning. It's "a way to transition the business in the event of a tragedy," including death or disability, says Fulks. "Succession planning doesn’t necessarily involve selling your business," he adds. "It can mean growing your business, making it more robust, more marketable and more valuable. In the end, succession planning is not an event—it’s a process."
Indeed, the process can inform the entire life span of the practice. "You don’t have to be old or near retirement," says Robert Martin, managing director at Symmetry Partners in Glastonbury, Conn. "Creating a game plan from day one is a smart idea."
The plan may entail transferring the business to a son or daughter or trusted younger partner. Such transitions work best, says Martin, "if there is a high level of confidence in the ability of the heir or junior partner to continue to provide a consistent level of service. [But] the lack of a proven track record … is the predominant risk factor."
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