What You Need to Know About Succession Planning

Posted by Mark Piquette on August 6, 2014

As a financial advisor, you’re always thinking about your clients’ future. But what about your future? A recent survey conducted by CLS Investments shows more than 40% of independent advisors expect the sale of their business to account for between a quarter and half of their retirement. This figure stands in contrast to the reality that most advisors are wholly unprepared to pass on their business to a successor. David Grau, President and Founder of FP Transitions, says fewer than one in 10 advisors will sell their practice at the end of their career. It’s why a whopping 99% of independent practices die after one generation. Building an enduring business requires planning. Grau reviewed the ingredients of a successful succession plan in a recent Genius Session for Trust Company of America.

Many advisors think succession planning is synonymous with selling. It’s not. A succession plan, according to Grau, is best defined as “a professional, written plan designed to build on top of an existing practice or business and to seamlessly and gradually transition ownership and leadership internally to the next generation of advisors.” The operative word in the definition is plan. Grau suggests a plan that allows for a gradual transition into retirement—from working five days a week, to four, to three and so on—while the business is taken over by one or more partners you trust. Planning in this way helps to elongate careers and ensures a smooth changeover to the new ownership team.  

Once the general outlines of a plan are made, Grau says advisors need to develop and establish the four foundational building blocks of the practice: the organizational structure, the entity structure (LLC, etc.), the compensation structure and the profit structure. Related to the last two building blocks, the value of the practice takes two forms: cash flow and equity. Grau urges advisors to build the equity value of their practice, then gradually sell shares as they move towards retirement. The graph above shows a suggested timeline for transitioning ownership.

Finally, Grau reminds independent advisors to have a backup plan. An internal transition—from one partner to another—generally allows for more continuity and greater value and choices for the original partner. When an internal transition isn’t possible, a 50-to-1 buyer-to-seller ratio leaves open the possibility of an external sale.

For advisors who are overwhelmed by the prospect of relinquishing ownership of their business, Grau’s book, Succession Planning for Financial Advisors: Building an Enduring Business, is a good place to begin thinking about succession planning. Contact FP Transitions for more information.

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