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Financial Advisor Paths to Succession: A Holistic Approach

  • Business continuity and succession development is smart business for advisory practices of all sizes.
  • Options in today's market range from internal succession to sales, mergers, or strategic combinations.
  • Take an intentional yet flexible approach to transitioning your practice — to take advantage of time and opportunity.
Head of Practice Management

Most financial advisors who have dedicated their careers to cultivating client relationships and building strong advisory practices eventually want to retire. It’s natural for advisors to feel nervous about this transition. It’s also normal to be nervous about the prospect of stopping work sooner than you’d planned.

If you share these concerns, you’re not alone. Nearly 40% of advisors anticipate retiring in the next ten years. This puts roughly $11 trillion in assets under management in motion, and one in four of these advisors are unsure of their business transition strategy.1

As an advisory practice owner, the good news is, you can increase the likelihood of a successful transition by being strategic and creating a well-crafted continuity and succession plan.

Your continuity and succession plan can be a powerful tool to help:

  • Maximize the value of your business.
  • Bolster client retention.
  • Minimize the risk of partnership misalignment. 
  • Reduce friction between potential buyers and sellers.

There is value in starting to lay groundwork for your transition as soon as possible.

Succession and Continuity Planning Is Smart Business

As an advisory practice owner, embracing clarity and discipline in your business continuity and succession planning will serve you well. Doing so empowers you to consider opportunity costs, which can help guide you towards more profitable decision-making.

Clarity and discipline are important elements of business plans that incorporate vision, strategy, and tactics. A comprehensive plan can help you address practice viability from multiple perspectives, including that of a:

  • Fiduciary: Safeguarding clients’ best interests
  • Business Owner: Protecting enterprise value, including client and team retention
  • Client Experience Advocate: Ensuring that unforeseen events or an advisor’s retirement won’t negatively affect clients

Evaluating Business Transition Models

In today's market, there are numerous options available for transitioning a practice, including: internal succession, pursuing a direct sale, aiming for a merger or acquisition, or combining elements of multiple approaches. And different transition options offer varying degrees of opportunity and control, each with pros and cons.

Internal Succession

Internal succession, an organic growth strategy, involves transitioning equity to an individual or group within your practice. Considerations include:

Pros Cons
  • A high degree of continuity for clients and your team
  • Advisory owner can retire once process is complete or maintain a limited role if desired
  • Need for hiring and training if the best leader for the business doesn’t exist internally 
  • Internal buyers often face capital constraints requiring longer-term financing or earn-out proviso structure

Direct sale

A direct sale involves the divestment of the practice, where advisory owners sell all equity to a buyer. The buyer is usually another advisor, advisory team, or a financial institution like a bank or trust company. After the deal closes, all client relationships are transitioned. Considerations include:

Pros Cons
  • Provides more immediate liquidity, though performance and retention criteria may be part of the agreement
  • Common deal terms include cash down payment with the balance financed 
  • High potential for disruption of clients and team

Merger with or acquisition of another practice

Merger and acquisition (M&A), an inorganic growth strategy, entails expanding the business, often designed to boost market share and scale. Considerations include:

Pros Cons
  • Access to new markets, expanded practice expertise, and economies of scale 
  • Medium to high degree of continuity for clients and team
  • Finding the right advisory business match can be challenging
  • Integration of the businesses may be complex 

Five Guidelines to Shape Your Transition Strategy

Advisory owners face a series of decisions that require introspection and careful consideration of the potential tradeoffs. A proactive approach can help minimize client experience disruptions when unplanned scenarios arise and also help avoid sacrifices to personal timelines.

Here are five key guidelines to consider as you create your succession plan:

  1. Budget ample time for a transition.
    An effective plan can take years to fully execute but timelines can vary greatly. It could take as little as one year or up to 10, depending on the path you pursue and the length of time it may take to bring together those elements you may have less control over.

    Shorter timelines impose constraints and entail risks that longer timelines may not. The more time there is to build and evolve your plan, the better.
  2. Understand the drivers of practice valuation and address weaknesses early.
    Many well-established methods for valuing an advisory practice exist, but they all involve some degree of complexity and subjectivity.

    In assessing a practice, the revenue multiple can be a starting point with adjustments then made (up or down) to reflect individual characteristics of the business, such as assets under management, revenue mix, and client age and tenure.
  3. Focus on key decision factors.
    Develop a cohesive vision for client experience and practice culture; establish clear expectations and define roles and responsibilities to ensure a successful outcome.

    Consider how to approach the integration of new technologies, pricing strategies, and pathways to realize anticipated benefits, including economies of scale.
  4. Build your human capital.
    Similar to client experience, a practice's people plan is crucial in the advice business, which thrives on relationships and service.

    Attracting, retaining, and developing talent is vital for long-term success, aligning seamlessly with your continuity and transition planning process.
  5. Be proactive with clients.
    Transparency is essential for client assurance during any transition — planned or unplanned. Clear communication and collaboration with the eventual successor ahead of time helps ensure continuity in service, investment management, and product selection. This encourages a proactive approach for client retention as your business evolves.

Provide Clarity for the Future

Continuity and succession planning often extend beyond retirement. Careful planning provides clarity for the future and helps you safeguard the business you’ve diligently built. Enhance your chances of a successful transition by establishing and maintaining a robust plan for continuity and succession.

Core Bonds Are More Fairly Balanced After 15 Years of Imbalance

Jumpstart and Enhance Your Succession Planning

For more succession insights, including risk mitigation strategies and advice to conduct a self-assessment, download “Succession, Scale, Capabilities, or a Combination? Evaluating Succession Opportunities.”

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