Nearly 90% of financial advisors lack a formal succession plan, an Investment Planning Counsel survey revealed in May. Although 69% of the financial advisors surveyed were nearing retirement or had started to make a plan, 75% of them had only a rough or no idea of how the plan would look.
Given that advisors create estate and succession plans for their clients every day, is this just procrastination or something more?
For financial advisors, like most business owners, their practice is often their largest asset. The pressure to obtain the best possible valuation is high. But to get the result they desire, advisors must start planning for this transition at least five years in advance in order to understand their worth today, how it compares to their desired valuation and what steps are necessary to bridge the gap.
The scope of this task can be overwhelming to an advisor who is simply trying to keep up with the day-to-day responsibilities of marketing the firm’s brand, generating new business, servicing existing clients and maintaining regulatory compliance.
Planning your exit successfully demands a particular process, especially when the supply of sellers may outstrip demand.
Take these steps to stop procrastinating on your succession plan – and get started now.
Determine Your Current Valuation
Start by getting a current valuation of your firm. A valuation does not guarantee what a buyer will pay or what a seller will accept, but it does create an objective beginning point.
The valuation is going to depend on many factors, including recurrent revenue flow, the balance of clients in the accumulation versus distribution phase, the strength of the firm’s overall team and office policies, and how much of the practice is dependent on the goodwill generated by the selling practitioner. It is important to take changing market conditions into account, as a recession can depress assets under management and, in turn, the valuation.
Address Factors That Depress Valuation
A practice that generates a generous livelihood for the advisor may still produce a low current valuation. Factors that can depress the valuation: high average age of the client base, commissionable products, assets that cannot be easily transitioned and even geographical distribution of clients.
Now is the time to start addressing valuation factors. Don’t wait until the last minute.
Take Action to Increase Valuation
Mature advisors can remedy these factors by actively working with centers of influence, or COIs, to generate a steady stream of new clients who are more positively correlated with a higher valuation.
Even advisors who work with commissionable products may be able to choose revenue options that create additional recurrent income. Finally, advisors can diversify their senior clientele by reaching out to the next generation. This action helps get the ball rolling on locking down a succession plan and also helps these clients trust the future owner.
Decide on a Sale or Transition
Advisors can sell to an outside buyer or internal staff, and this can be a tough choice. Many find it the most challenging aspect of their succession plan because they want to make sure that the incoming party is responsive to their clients and handles their accounts in an ethical manner. For an advisor who has worked in a local community for a long time, maintaining the firm’s reputation is paramount.
Don’t leave this decision to the last minute.
If a firm has multiple partners, having a buy-sell agreement is an excellent way to smooth a transition in the event of retirement, death or disability. Partners should fund the legal agreement with cash-value life and disability insurance to protect the remaining partners in the event of an unexpected early transition and to provide liquidity to complete the transaction.
Many planners like to look to junior associates for their ideal buyer. A junior associate can make the transition more seamless, as they are already familiar with both the practice and the clientele. Still, it is imperative that the senior planner properly positions the associate as the designated successor long before the formal retirement announcement, so that clients view him or her as capable of handling their accounts.
If you decide on an outside buyer, the focus should be successfully integrating the buyer into the firm. Give yourself enough time to make critical introductions and answer questions.
Structure the Deal
If you are part of a much larger firm, you have more options for structuring the deal. However, owners of smaller firms can research options through online presentations, conversations with peers at conferences and via their network.
Matchmaking firms have become more abundant and can assist with vetting buyers, negotiating terms and even offering attractive financing. Independent broker-dealers and insurance producer groups have stepped up their services to help retain client assets on their platforms. Some firms, such as Edward Jones, have also added financial incentives for mature advisors who transition their assets to women and minority planners.
Attractive book purchase financing terms, including the elimination of origination fees, are often available. These financing arrangements can reduce the underwriting time to complete deals, provide a single point of contact during the transaction, and help avoid regulatory and tax quagmires in accordance with the advisor’s tax counsel.
Monetizing a practice while providing continuity to clients does not have to be daunting. Most advisors have the client conversation regarding retirement and business succession down cold. They simply need to put themselves in the client’s shoes and have the same conversation with themselves.
Don’t Wait Too Long to Start
The most important plan financial advisors can create is their own. A well-executed plan protects an advisor’s family, clients, business partners and personal dreams of retirement. This planning is so important that the Securities and Exchange Commission has made it a focus of its 2021 examinations for registered investment advisors.
Many advisors would like to work far beyond their expected retirement age. However, the pandemic has caused many of them to reevaluate how they want to spend their senior years. They may have come to realize that flexibility is their most valuable asset, created by having a high-value firm with a trusted partner who is available at the right time.
The most critical step to a successful plan is just to get started.