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Blogs - Practice Perfect
Before Laying Succession Plans, Create a Roadmap
Financial Planning
Thursday, September 29, 2011
Partner Insights

Financial Planning senior editor Donna Mitchell says financial advisors are particularly skilled at helping their clients define how their financial lives are -- and should be -- structured. If only they were able to do the same for their practices.

FA Insight, the Tacoma, Wash.-based research firm, found that some principals of registered investment advisor firms do not clearly define their firms’ organizational structures. It hinders their ability to give clear blueprints and roadmaps for success to their staff members. Over the long term, that cloudy sense of an organization’s framework can present challenges when an organization wants to groom future leaders, and its principal and founders want to map out succession plans, Dan Inveen, FA Insight’s principal and director of research said during a telephone interview.

Industry professionals know about the challenges in developing staff and preparing the firm for succession.

“What we don’t hear specifically, is what are the nature of these challenges, the forces that are getting in the way of driving people and being adequately prepared for succession,” Inveen said. 

 FA Insight decided to bring those issues front and center in its study, “The 2011 FA Insight Study of Advisory Firms: People and Pay”. The 84-page report is packed with loads of useful information, including salary breakdowns for various titles, across lower median and upper quartiles.

 But some of the report’s most salient points, involved how firms groom tomorrow’s leaders, or what they ought to be doing. Although advisory firms had found surer footing in 2010, by most measures, it revealed a remarkably shallow bench of associate advisors to eventually lead firms when their more senior professionals leave the profession. 

About 44% of lead advisors at firms are the primary owners and typically have two decades worth of experience. Roughly, just two associate advisors exist to succeed every three lead advisors, creating a gap in the experience that firms need and want.

Advisory firms cannot count on pulling experienced advisors from the brokerage channel to fill the gaps. Not when many of the most seasoned advisors are more than 50 years old.

“There is a shortage of the ‘associate advisor’ position,” Inveen said. Luckily, the study found, firms recognized this and had begun to close the gap. “Two years ago, we found that just 45% of firms had those associate advisors in place. In the latest study, 60% of firms had them.”

Another issue is that equity in firms is a growing concentration of firm ownership among a few advisors at the top. “As a select few hold an increasing concentration of shares,” Inveen said, “it becomes challenging to distribute these shares, b/c of the high value and lack of ability of other staff to buy in.”

“As a founding owner, the longer you wait to transition shares to others within the firm, the more challenging it is to carry out an internal succession,” Inveen said. “You’ll have to look to an external party to get equity out of firm.”
 That might suit advisors with aspirations of selling a stake or the entire firm in to a national network of firms like New York-based Focus Financial Partners, or United Capital Private Wealth Counseling, based in Newport Beach, Calif.

But those transactions might change the nature of a firm too drastically. If that is not what firm principals want, then they ought to start laying plans.



(215) Comments
A huge amount of Financial Advisors would benefit substantially by carefully structuring this type of a plan. Their clients would benefit from it and appreciate it too.

Gene Panasenko Financial Consultant Wealth Manager

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