The Importance of Succession Planning

As of 2023, the average age of financial advisors is 56, and it’s estimated that 40% will retire over the next ten years. Despite this looming retirement, one out of four financial advisors don’t have a clear succession plan in place.

Whether you plan to retire soon or work for the foreseeable future, a succession plan is crucial. Life is unpredictable; you never know when an unexpected health issue or sudden career disruption could arise. A well-crafted succession plan protects your legacy and ensures your clients are cared for regardless of the future.

Below, we’ll define succession planning and explore why it’s so important for financial advisors. After that, we’ll outline six steps to create a comprehensive succession plan.

What is Financial Advisor Succession Planning?

A succession plan outlines your company’s steps to ensure its continuity of leadership, employees, and client relationships after your departure. It also clarifies your preferred timeline and communication protocols.

The succession planning process typically involves the following steps:

• Identifying a successor – Designating a successor can enhance continuity for your employees and clients. To ensure a good fit, consider your prospective successors’ skills, experience, leadership potential, and desire for advancement.
• Developing your successor – Whether you choose an internal candidate, family member, or outside buyer, it can take several years to prepare potential successors to step into your shoes. Thus, it is important to provide proactive training, mentorship, and other career development opportunities.
• Planning the transition – After choosing a successor, you need to decide whether you want to gradually transition your company’s leadership or opt for an immediate handover. You also need to decide how to communicate your departure to your employees and clients to ensure their retention and ongoing satisfaction.
• Bolstering your business’ market value – Whether you plan to sell your practice or pass it down to your heirs, you must know what it’s worth. After assessing its value, you can determine how to optimize it over time.
• Creating contingency plans – Despite your best efforts, life doesn’t always go as planned. As a result, it’s essential to have documented protocols outlining how your company should respond in case of an emergency, such as your sudden passing or incapacitation.

Why is Succession Planning Important For Financial Advisors?

As a financial advisor, you regularly assist your clients in preparing for retirement and optimizing their investments. Since your business is likely one of your most valuable assets, it deserves the same level of thoughtful planning and attention.

Here are three benefits of succession planning for financial advisors:

#1 Peace of Mind

Building a successful financial advisory practice can take decades. During that time, many advisors develop close relationships with their clients and play a crucial role in their major life milestones.

If you’re emotionally invested in your clients’ well-being, you naturally want to ensure they’ll be cared for after you’re gone. A succession plan can offer your clients the same peace of mind that an estate plan provides you for your family.

#2 Enhanced Business Value

A key component of succession planning is looking for ways to boost your business’ value. The mere presence of a succession plan can make your business more attractive to potential buyers because it shows them that:

• You take the future success of your business seriously.
• Your employees and clients are more likely to stay with your practice post-transition.
• Your firm is less likely to experience operational disruptions or delays after the sale.

Along with helping you sell your business for a higher price, the improvements you pursue throughout succession planning can improve your profitability and performance.

#3 Resilient Leadership

At some point in the future, whether tomorrow or in ten years, you won’t be able to lead your company. When that day comes, you want to leave it in capable hands. Succession planning gives you a framework and timeline for selecting and grooming your successor, helping you feel more confident when the time comes for them to fill your shoes.

6 Steps to Create a Financial Advisor Succession Plan

Now that you know the benefits of having a succession plan, let’s review the six steps for creating one.

Step #1: Identify Potential Successors

The first and most critical step in succession planning is selecting your successor. Given the significance of this decision, you want to allow yourself plenty of time to make the right choice. Ideally, you should begin identifying and grooming your successor five to seven years before you plan to retire.

You can choose your successor from the following categories:

• Family members – Leaving your business to a family member, such as your child, grandchild, or spouse, can provide them with financial security and a sense of purpose. However, you need to make sure that they have the necessary experience and interest in managing the business.
• Internal advisors – Advisors within your firm are another strong succession option. Nearly 80% of advisors choose an internal successor because it’s easier to train them than onboarding a family member or external buyer in a time crunch. Plus, internal candidates already have relationships with your clients, ensuring continuity. If your firm has potential successors, check in with them to gauge their interest.
• Outside buyers – You can also explore your options with external buyers. Nearly half (49%) of advisors are either “open to or actively seeking” to purchase practices, creating a solid market for your business. Selling your practice to an up-and-coming or large registered investment advisor (RIA) can offer the biggest payout upon retirement.

As you evaluate potential successors, make sure they’re a good fit for your company’s culture, share your investment philosophy, and possess strong leadership skills. This way, your clients can enjoy consistent service during and after your departure.

Mentor Your Successor Over Time

After narrowing down your selection, you can start preparing your successor to fill your role by:

• Gradually increasing their responsibilities.
• Having them shadow you during meetings.
• Allowing them to build relationships with your clients.
• Teaching them about the operational side of your business.

This hands-on experience, combined with regular feedback and coaching, can help your successor develop the skills they need to step into your leadership role when the time comes confidently.

Step #2: Assess Your Practice’s Market Value

The next step in succession planning is estimating your business’s value. While it may increase as you approach retirement, having an initial baseline figure can guide your decisions and shape your strategy.

Some metrics to factor into your valuation include:

• Assets under management (AUM)
• Annual revenue
• Fee-based business vs. commissions
• Rate of return on fee-based business
• Scope of products and services
• Client composition (high-net-worth, retirees, young professionals, etc.)
• Client retention rate
• Employee turnover rate
• Growth rate
• Technology and infrastructure
• Brand reputation and market position

The most valuable financial advisory practices typically have a diverse client base, strong client and employee retention, consistent revenue growth, time-saving technology, and a broad range of products and services.

Learn more: Measuring Your Book of Business as a Financial Advisor

Step #3: Conduct Periodic SWOT Analyses

After assessing your business’s current value, you can identify ways to enhance it over time using a SWOT analysis, which evaluates your firm’s strengths, weaknesses, opportunities, and threats.

Here’s an example of what a financial advisor’s SWOT analysis might look like:

• Strengths – Loyal client base, outstanding reputation, strong investment performance
• Weaknesses – Outdated technology, aging client base
• Opportunities – Growing demand for sustainable investing, expansion into younger markets
• Threats – Economic fluctuations, increasing competition, regulatory changes

Based on this SWOT analysis, this advisor may want to focus on upgrading their technology, diversifying their client base, and bolstering their sustainable investing offerings.

Clarify Your Unique Contributions

As you conduct your SWOT analysis, take stock of the unique strengths that you bring to the table, whether that’s your expertise in niche areas like charitable trust planning or alternative investments. These strengths will leave with you if they aren’t passed on to your successor. Thus, you may want to train them in those areas to maintain your firm’s market position.

Additionally, consider the fresh expertise your firm could benefit from moving forward. Digital marketing skills, cryptocurrency knowledge, or impact investing experience could add tremendous value to your firm and be a competitive advantage for your successor.

Step #4: Keep Your Team in the Loop

Studies show that roughly one-third of employees leave their companies within the first year of their sale or acquisition. The main factor driving this turnover is uncertainty—employees often feel uneasy about their job security, roles and responsibilities, and shifts in the company culture under new leadership.

You can mitigate employee turnover after your retirement by keeping your team in the loop leading up to your transition. For instance, you can:

• Let your team know about your succession plans in advance.
• Provide a clear timeline for your transition.
• Explain why you chose your successor.
• Request their feedback and address their concerns.
• Offer professional development opportunities, so they feel valued and secure at the firm.
• Clearly communicate any changes to their roles or responsibilities.
• Reassure them about their job security.
• Involve your successor in team meetings.
• Offer retention bonuses or other incentives.

Fostering open communication and providing clarity throughout your transition can help maintain morale, reduce uncertainty, and ensure a smoother handover.

Step #5: Communicate Your Succession Plan With Your Clients

After tending to your team, it’s time to focus on your clients. You want to reassure them that they’ll continue to receive excellent support under your successor.

Start by having candid conversations with your most trusted clients. Inquire about their concerns and see how you can help them feel more comfortable throughout the transition. Some questions you can ask them include:

• How far in advance do you want to be informed about my retirement?
• Do you feel understood and supported by other advisors on my team?
• What aspects of our relationship do you value most?
• How can my successor maintain sufficient continuity?

After considering your trusted clients’ feedback, craft a detailed communication plan to keep your clients informed throughout the succession process. This plan should outline how and when you’ll introduce your successor. Consider using this four-part approach to deliver the news:

1. Acknowledge that this change may be uncomfortable for your clients.
2. Explain how the transition has been designed with their needs as a top priority.
3. Explain why you chose your successor and emphasize your confidence in their capabilities.
4. Schedule follow-up meetings with you, your clients, and your successor so everyone can get to know each other personally.

Step #6: Plan Your Life Post Succession

Nearly 75% of financial advisors say that the emotional aspect of transferring their clients to a new advisor is a significant succession planning challenge. While closing chapters can be bittersweet, you can find relief by focusing on what you have to look forward to in retirement.

Here are some questions to consider during this process:

• Do you want to exit your firm entirely or stay on in a consulting capacity?
• What passions do you want to pursue in retirement that you haven’t had time for?
• How do you want to structure your daily routine once you retire?
• Do you plan to travel? If so, where and how often?
• What is a realistic retirement budget? How will you ensure sufficient cash flow?

After a rewarding career, you deserve to enjoy your retirement. Modeling a successful transition can set an excellent example for your clients, who may retain your services to prepare for the same process.

Create Your Succession Plan with Alden Investment Group

It’s never too early to start thinking about your succession plan. By preparing in advance, you can select the suitable successor, boost your business valuation, prepare your employees and clients, and choreograph a seamless transition.

Succession planning is essential, but it’s also a significant undertaking involving many moving parts and phases. Fortunately, you don’t have to create your succession plan alone. At Alden Investment Group, we can help you navigate the challenges and complexities of succession planning.

As a trusted RIA and broker-dealer, we’ve helped countless financial advisors craft solid succession plans. Thanks to our national network of financial advisors and dedicated recruiting professionals, we can help you find the right person to serve as your successor. We can also assist with:

• Implementing technology to make your company more valuable.
• Optimizing your workflows to enhance your profitability.
• Exploring alternative investment strategies to set your firm apart.

Discover how Alden Investment Group can assist with your succession plan today.

Sources:

Investopedia. Top Tips for Young Financial Advisors.
https://www.investopedia.com/articles/financial-advisors/101415/top-tips-young-financial-advisors.asp

J.D. Power. Time-Starved U.S. Financial Advisors Considering Alternative Options, J.D. Power Finds.
https://www.jdpower.com/sites/default/files/file/2023-06/2023067%20U.S.%20Finanical%20Advisor.pdf

Cerulli Associates. 40% of Advisory Assets Will Transition in 10 Years, According to Cerulli.
https://www.cerulli.com/press-releases/40-of-advisory-assets-will-transition-in-10-years-according-to-cerulli

Barrons. Intelligence Report.
https://www.barrons.com/asset/barrons/pdf/BA_IntelRep_Fall2022_F.pdf

National Association of Plan Advisors. Nearly 4 in 10 Advisors to Retire in 10 Years, Yet Many Lack Succession Plan.
https://www.napa-net.org/news/2022/6/nearly-4-10-advisors-retire-10-years-yet-many-lack-succession-plan/

MIT Sloan. Your acquired hires are leaving. Here’s why.
https://mitsloan.mit.edu/ideas-made-to-matter/your-acquired-hires-are-leaving-heres-why

FA Mag. Financial Industry In Danger Of Facing An Advisor Shortage, Cerulli Says.
https://www.fa-mag.com/news/the-financial-advice-industry-has-a-rookie-advisor-problem–report-says-73708.html