2 roads to building a successful succession

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While it’s easy to laugh at the irony of the dentist’s son having bad teeth, the planning industry is facing a similar paradox.

Despite dedicating their careers to preparing their clients for retirement or the next stage of their lives, only 17% of financial advisers have a binding and actionable succession plan in place, according to a white paper from SEI and FP Transitions.

The average age of financial advisers is over 50 and the industry is facing a dearth of incoming young talent. Advisers are struggling to figure out how to ensure their clients are taken care of when they retire.

Explanations for this situation vary widely depending on who you ask. Perhaps egos get in their way of advisers asking for help. Or maybe they work at a one-man independent operation and simply do not have many peers to turn to when questions arise.

Either way, the industry is facing a succession planning epidemic, and aging advisers must take action to ensure their clients’ assets are safe for the long haul.

But what options for succession planning are out there? Where does one start?

Traditional route: Slowly selling the book of business to another adviser
Traditionally, financial advisers have taken a slow and steady approach to succession planning by bringing in a junior partner, gradually introducing them to clients and transitioning the book of business over bit by bit. These transactions are often valued based on the business’ revenue and client retention levels. Monetization for the outgoing partner is usually done over many years.

Typically, these transactions are conducted within the same firm. The actual “business” — including the brand name, offices, operations, etc. — remain intact. Ideally, the incoming partner aligns with the retiring adviser’s investment and cultural philosophy, shares a similar image for the future of the firm and is someone the retiring adviser can fully trust to take care of their clients.

While this fairytale ending sounds like the ideal way to transition a book of business, the reality of the situation is that complications arise and the process is never simple or clean.

Finding the right partner can be an incredibly difficult process. In my two decades of assisting advisers transitioning their books of business, I’ve seen arguments arise between incoming and outgoing advisers on a range of topics — from how formally to address clients to what suits they need to wear.

Outgoing advisers often become uncomfortable with the speed at which the incoming adviser wishes to conduct the transition. On the flip side, occasionally the retiring adviser becomes too sick to work and the transition must be expedited.

Alternate route: Selling the business to a professional buyer
Sometimes the traditional route of selling solely the book of business doesn't work. Alternatively, advisory firm owners can sell their entire business to an institutional buyer —such as an RIA rollup shop, private equity firm or a regional acquirer. This is a viable option that is growing in popularity across the industry.

Institutional buyers are tasked with taking control of the entire business. These transactions are typically valued off of earnings before interest, tax, depreciation and amortization (EBITDA), and monetization for the selling adviser is largely done upfront with an earn-out.

Selling advisers should find a buyer that aligns with their cultural philosophy and has a strong track record of integrating acquired businesses. Finding a firm with the right experience is key to ensuring a smooth transition for both parties, as well as making sure the clients are taken care of properly.

Selling the business to an institutional buyer can also provide the clients with some of the benefits that come with scale. Larger firms often possess more intuitive and sophisticated technology platforms that help advisers and clients navigate the financial planning process. Other capabilities can streamline the monotonous back office tasks required by many advisers, which allows them to work more efficiently and focus on handling the client accounts. Larger firms also come equipped with robust legal and compliance departments that provide advisers with the resources they need to stay compliant in today’s evolving regulatory environment.

As today’s generation of advisers continues to age, the need for succession planning will only intensify. Thankfully, these two viable options exist that can make the process a successful one for every retiring adviser.

This is part of a 30-30 series on smarter succession planning.

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