6 Steps to Effective Succession Planning for Financial Advisors

As a financial advisor, you work hard to grow your client base and book of business. While you’re focused on this ambitious growth, succession planning may be the last thing on your mind. However, as the wise Benjamin Franklin once said, “Those who fail to plan plan to fail.”

So, what is succession planning? And what steps does it entail?

In this article, we’ll define succession planning and explore six steps to create an effective succession plan for your financial advisory practice. After that, we’ll highlight how working with a trusted Registered Investment Advisor (RIA), like Alden Investment Group, can streamline the process.

What is Succession Planning for Financial Advisors?

Succession planning is the process of preparing your financial advisory practice for a future transition in leadership. A strong succession plan ensures that your valued clients continue to receive quality service, even after you retire or face an early exit due to unforeseen events. The succession planning process typically includes:

• Identifying and training a successor.
• Determining the current value of your practice.
• Optimizing key aspects of your operations.
• Informing your team and clients about your upcoming transition.
• Ensuring a stable financial future in retirement.

While succession planning is an essential process, many financial advisors treat it as an afterthought. In fact, 40% of financial advisors haven’t created a succession plan yet.

Ideally, you want to give yourself at least five to seven years to craft your succession plan. If you’re one of the estimated 40% of financial advisors that will retire over the next ten years, time is ticking.

Even if you plan to remain in the industry for many decades, it’s never too early to start succession planning. Unexpected changes or crises can occur at any time, and preparing in advance ensures your business and clients remain in good hands.

6 Steps to Create a Succession Plan as a Financial Advisor

Crafting a comprehensive succession plan takes time and careful consideration, so it’s crucial to start the process long before your planned transition. With that in mind, here are six steps to create a detailed succession plan that will benefit both you and your clients.

Step #1: Understand What’s at Stake

Before diving into the succession planning process, it’s important to understand its purpose and benefits. After all, succession planning requires significant time and effort. Understanding its advantages can help you approach the process with clarity and motivation.

A well-crafted succession plan can provide your practice with the following benefits:

• Business continuity and client retention – A solid succession plan guarantees that your clients’ financial needs will be met as you exit your practice. In turn, it can reassure them that they’ll be taken care of, enhancing their trust, confidence, and loyalty to your firm.
• Value preservation – Your business is likely one of your greatest assets, so selling it can provide you with financial security upon retirement. An effective succession plan can help you maximize this payout by enhancing your business value through strategic optimizations and risk mitigation.
• Regulatory compliance – As a financial advisor, you operate in a highly regulated industry. Therefore, it’s essential to navigate these regulations carefully throughout your exit process to ensure a compliant transition.

While creating a succession plan has powerful advantages, forgoing one can have equally dire consequences, such as:

• Lower offers from potential buyers – Without a structured transition plan, potential buyers may view your practice as a risky investment. They may have concerns about client retention, continuity, or legal hurdles, leading them to offer less for your practice or avoid purchasing it altogether.
• Client attrition as your clients lose confidence in the stability of your practice – When a financial advisor exits or sells their practice, clients often feel uncertain and may seek alternative options, particularly if they haven’t been given sufficient notice.
• Legal complications or regulatory penalties – Without a succession plan, you may be more likely to fall out of compliance with industry regulations, potentially leading to legal complications and costly penalties.
• A tarnished legacy – They say it takes 20 years to build a reputation and five minutes to ruin it – you don’t want those five minutes to take place during your transition. Failing to leave your practice in capable hands can undermine your leadership, damage your reputation, and tarnish the legacy you’ve worked so hard to build.

Read More: The Importance of Succession Planning

Step #2: Identify a Successor

Once you’re ready to dive into the succession planning process, one of the most critical decisions you’ll need to make is who to designate as your successor. You can choose a family member, external buyer, or internal successor. Eighty percent of advisors select an internal successor since they’re already familiar with the practice, its clients, and its culture.

No matter who you choose, just make sure they possess the following qualities:

• Alignment with your values – Clients stay at your practice long-term because they appreciate its core values, whether that’s providing personalized service or pursuing alpha-generating investment strategies. Thus, you want to make sure that your chosen successor shares the core values that differentiate your practice from competitors. This alignment can reduce the chances that friction will arise between your clients and successor once they take over.
• Comprehensive understanding of your service model – Every financial advisor has a unique business model, from their pricing structure (fee-based, commission-based, hybrid, etc.) to their investment philosophy (active, passive, value-based, etc.). To ensure ongoing client satisfaction, you must teach your successors about these intricacies and the reasoning behind your choices.

Read More: Financial Advisor Fee Structures: Comparing Flat Fee and AUM

• Client relationship management skills – In the financial advisory industry, the success of your business is largely influenced by the quality of your client relationships. As a result, it’s essential to select a successor who can build trust and sustain strong relationships with your clients after you’re gone. Candidates who exhibit empathy, leadership, and communication skills are most likely to keep clients satisfied after your departure.
• Strong work ethic and drive – Not everyone makes it in the financial advisory industry. In fact, 90% of financial advisors exit within three years. To ensure your firm’s continued success, look for a successor who has the passion and perseverance to take your business forward.

Naturally, it can take time to find someone who has these qualities. That’s why giving yourself ample time to conduct your search is so important.

Step #3: Train Your Successor

Once you select a successor, you must thoroughly train them so they’re ready to fill your shoes. You can do so by gradually involving your successor in managing your clients’ accounts, walking them through your investment strategies, and explaining your rationale for key decisions. This hands-on approach gives your successor a chance to become familiar with your clients’ financial situations and build confidence in their abilities.

Along with training your successor behind the scenes, give them opportunities to get to know your clients face to face. For example, you can let your successor join you in client meetings and gradually give them more client-facing responsibilities when the time is right.

During the training process, you may discover certain gaps in your successor’s skills. For example, maybe they lack experience with alternative investments or multi-generational wealth strategies. You can help close these gaps by encouraging your successor to:

• Obtain additional certifications
• Attend educational conferences
• Mentor under a subject-matter expert

By dedicating ample time to their training and providing ongoing feedback, you ensure that your successor is well-equipped to uphold your high standards once you step away.

Step #4: Build More Value in Your Practice

After training your successor, it’s time to turn your attention to your practice. Assessing its market value can help you make strategic improvements that allow you to sell it for a higher price and set your successor up for success.

Here are a few ways you can build more value in your practice leading up to your retirement:

• Diversify your recurring revenue streams – Your revenue is one of the most important aspects of your firm’s financial health. If most of your revenues currently come from one-off commissions, you may want to expand your service offerings. Along with strengthening your revenues, this move could help you attract higher-net-worth clients with more complex financial needs.
• Invest in new technology – Leveraging the right technology can transform your firm’s operational efficiency. It can also facilitate a more seamless transition after you retire. For example, a Turnkey Asset Management Platform (TAMP) can centralize your client data and streamline many tedious aspects of your practice, including asset management, administration, and regulatory compliance. In turn, adopting the right TAMP can free up your time to focus more on your client relationships and business growth.

Read More: What is a TAMP and Should You Use One?

• Assess your client satisfaction – While your tech infrastructure is crucial, the value of your financial advisory practice ultimately stems from your clients. Thus, it’s important to check in and see how well you’re meeting their needs. Based on their feedback, you can pinpoint areas for improvement and implement new strategies to enhance their loyalty, whether that involves ramping up your communication frequency or expanding your service offerings.
• Document your business model – After optimizing your revenues, workflows, and client relationships, create a comprehensive document that outlines these processes and key practices. This resource can serve as a valuable guide for your successor, ensuring they maintain the same quality of service after your transition.

Building value in these areas can make your practice more attractive to potential buyers. Better yet, it can enhance your earnings while you still run your firm, providing a stronger foundation for a smooth and profitable transition when the time comes to step away.

Read More: Measuring Your Book of Business as a Financial Advisor

Step #5: Communicate Your Transition Plans With Your Clients

So far, the steps we’ve discussed will take place over several years and largely behind the scenes. However, the time will come when you need to openly communicate your transition plans with your clients.

Once you’ve set a firm retirement date, you can thoughtfully inform your clients about your upcoming transition. This process may involve:

• Discussing your upcoming retirement during scheduled meetings.
• Sending a newsletter detailing the changes they can expect upon your retirement.
• Reassuring your clients that their needs have been at the forefront of every decision.
• Introducing them to your successor, if you haven’t already.
• Explaining why you’re confident that they’re in capable hands.
• Outlining the steps you’ve taken to guarantee a smooth continuation of service.
• Giving them the opportunity to voice any thoughts, concerns, or questions.

After announcing your exit, make sure to allocate sufficient time to let your clients get to know your successor before the transition. This can help ease their anxieties and build their trust in your successor.

Step #6: Plan for Your Retirement

Succession planning often focuses on the future of your practice. However, your future is equally important. You can prepare for your life after leaving the industry by:

• Reviewing your finances – As a financial advisor, you know better than anyone that preparing for retirement requires careful financial planning. Therefore, it’s important to revise your financial plan and investment portfolio to ensure you’ll have enough income to support your lifestyle and cover your expenses during retirement.
• Planning out how you’ll spend your time – A satisfying retirement is about more than financial security – it’s also about creating a future you’re excited to embrace. As such, you should map out how you plan to spend your time, whether that involves traveling, volunteering, spending more time with family, or remaining at your firm in a consulting capacity. These plans can help you approach your next chapter with a sense of purpose and confidence.

Ensure a Seamless Succession With Alden Investment Group

In summary, succession planning is a strategic process that can support your retirement, ensure the longevity of your practice, and preserve the client relationships you’ve built over the years. By starting now, you’ll have more time to find a suitable successor, pinpoint opportunities for growth, and refine your exit strategy.

Just as clients rely on you for financial guidance, you may want to enlist the expertise of a succession planning specialist to help navigate this important transition. If so, Alden Investment Group is here to support you.

As an experienced RIA and broker-dealer, we specialize in helping advisors craft customized succession plans that align with their unique needs and goals. By joining our RIA, we can help you boost your business valuation, implement efficient technology solutions, and identify a qualified successor to ensure a smooth transition.

Want to learn more about our succession planning support? Reach out to Alden Investment Group today.

Sources: 

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

Advisor Perspectives. An Unexpected Solution to the High Failure Rate Among New Advisors.
https://www.advisorperspectives.com/articles/2022/02/15/an-unexpected-solution-to-the-high-failure-rate-among-new-advisors