Many financial advisors are putting off their succession plan until some unspecified time in the future.
Nearly 90% of financial advisors lack a formal succession plan, according to an Investment Planning Counsel survey. Although financial advisors are well-versed in the consequences for a client who fails to plan for retirement, they don’t always foresee the problems that can occur if they do not have a plan for their eventual departure from their own firm.
More often than not, their departure will be unexpected, due to an untimely death or disability. At that critical moment, the repercussions of failing to create a plan are immense. They can even set off a series of events that will push the practice into a death spiral.
The Firm’s Value Plummets
Succession planning is best started by getting a professional valuation of the firm, so you can optimize your practice to achieve its best value. Without a viable plan, the value of the firm immediately goes to fire-sale pricing. The advisor’s family will not be able to recoup the intrinsic value because buyers will recognize the hurdles the family faces.
The Firm’s Income Stream Ceases
If family members are not professionally licensed as financial advisors, they cannot continue to collect advisory revenue, trail commissions or other vested commissions. Their desire to liquidate the firm intensifies, further driving down the price they will accept.
Financial Relationships End
Without adequate procedures, the firm’s regular bills may not be paid in a timely manner. Client billing may also not be optimally handled, reducing the firm’s liquidity. If the practice has outstanding debt obligations, banking relationships and vendors may become concerned and cease working with the firm. This is especially a concern in smaller firms, where the goodwill of the founder is key to these relationships.
Key Employees Exit
Without clear leadership, employees may grow concerned about their personal job security. Key employees will easily be able to find other positions, often with competitors who will be delighted to benefit from your employees’ business relationships. Continuity of service will suffer as more employees leave. The remaining employees may not be experienced or licensed to handle ongoing needs.
Clients Walk Away
While competitors may aggressively court the firm’s roster, clients will typically allow a firm about 60 days to communicate with them about the continuity plan following the untimely death or disability of the financial advisor. After that period, they become nervous and will start to entertain alternatives. This activity intensifies as the employees who have consistently serviced their needs are no longer available. Clients also rightfully become concerned when they are not able to trade on their accounts or have other key actions handled properly and in a timely way. As client exits increase, the firm’s value decreases proportionately.
The Firm Draws the Wrong Buyer
The family may find a buyer who gives them a better price but may be ill-fitted to the practice. Perhaps the buyer’s investment philosophy and management style are different from the founder’s, resulting in dissatisfied clients and disgruntled employees. While the family may have received a better price for the book of business from this buyer, the results may be antithetical to the firm’s original goals. The wrong buyer can also destroy the goodwill built by the founder, reflecting negatively on the heirs.
Taxes Are Less Than Optimal
When a founder dies or is disabled, the transition of the firm will not be as ideally reconciled with available tax benefits. This means that family members may not only have to accept a substantially reduced sales price, but they may also have to pay taxes that could have been reduced or at least deferred to a better payment schedule.
Transition-ready firms are not only more valuable, but they also fulfill commitments to multiple parties. Family members receive a better value for the practice. Employees are supported and remain confident about the firm’s future prospects and growth. Clients are properly cared for without a gap in service.
Poor consequences are easily avoided with basic planning. A rudimentary plan can alleviate the majority of concerns. The key is to get started.
Over the years, the advisor’s family, the firm’s clients and valued employees have provided the advisor with a prosperous lifestyle and good reputation in the community. Rather than letting procrastination on a succession plan destroy what you have built, make it a priority to ensure that you properly care for your most valued relationships to the very end.