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Succession Planning: Are You Being Negligent?
Thursday, February 20, 2014

Hereís a bucket of cold water coming at all you RIA founders: Youíre going to die.

Itís no secret. Your employees know it. Even worse, your clients know it. Still worse, your prospective clients know it, and it scares many of them to the point that they take their business elsewhere. Yet some 60% of advisors within 5 years of retirement donít have any viable succession plan, according to 2012 Cerulli data.

And all of this is bad for everyone involved. Your clients signed up in the first place because you told them you were going to be there for them over the long term. But with no viable succession plan, what will happen to them once youíre unable or no longer want to continue serving as their advisor? In fact, being there for them is a core part of your fiduciary duty; itís selfish not to take the necessary steps to ensure your firmís long-term viability.

For your employees, no succession plan means that they have no idea what their future looks like. They canít plan their careers or their lives. Everything depends on what happens to you.

Itís also horrible for your business and, by extension, your own financial well-being. As your existing clients age, they begin to gradually consume their assets. The only way to offset this natural consumption function is to add more, younger clients. But who in their right mind would want to get long-term financial services from a firm that is unlikely to be around for the long term?

Without viable succession plans, wealth managers will slowly drift off into oblivion -- willing partners in their own firms' demise. It's negligent behavior, and anything but benign.

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Given these certain, bad outcomes, the obvious question is: Why have so few firms actually put a rational succession in plan in place?


Well, for starters, succession planning is difficult.

Owners have to find a way to reach agreement with their employees, which generally requires that owners give up both economics and power over time. (The latter is much, much harder than the former.)

It is likewise impossible to find anything close to a perfect solution -- which for most advisors amounts to someone exactly like you whoíll come along and buy the business at the perfect time, when the market and the value of your firm is at its peak.

Thatís not going to happen, and you probably realize that.

The biggest reason why most wealth management firms have no viable succession plan is because of what it means personally for their owners. Itís a passage that marks the end of one phase of life and forces owners to recognize their own mortality. And who even wants to contemplate that?

Ironically, a core part of any wealth managerís job is to help their clients prepare for exactly this type of transition. You know it often takes skilled outside help for someone to work their way through the difficult emotions involved and accept that without a rational plan, there will be a very bad outcome for their spouses, children and broader legacy.


So for the 60% out there who keep putting off what they know they must do, here are a few steps to consider:

1. Consider "what if" scenarios. To start, come up with a disaster recovery plan for your company and family should something unforeseen happen to you in the short term. Think of it as the "hit by a bus" strategy.

2. Make a plan. Then apply the same kind of financial planning to your business that you do to your clientsí lives. Consider your own timing and goals. Given these, what various alternatives are viable choices? Could you sell to your staff, to another RIA, or to a bank or a roll-up? In our experience, the most realistic and attractive option is to sell your firm to another wealth manager. In addition to unlocking the greatest amount of value, this kind of transaction creates the greatest level of certainty for both clients and employees that the business will continue on indefinitely.

3. Adjust emotionally. Start taking the steps to prepare yourself emotionally for a transition. Accept that all of these changes are going to be very hard -- and that when theyíre complete, youíll begin a new phase of your life. As part of your preparation, consider getting some executive coaching. With professional help youíll probably make better decisions and be much happier with the outcome.

4. Understand your real options. Accept the idea that thereís no perfect solution. Every alternative is going to involve unattractive (and sometimes even downright ugly) tradeoffs. The key objective is to figure out which choice in the aggregate will be best for you.

Just remember: The worst option of all is for you to become a willing partner in your firm's demise. Donít do it.

Yvonne Kanner is president and COO of†Fiduciary Network, which provides funding to wealth management firms for internal transitions of equity ownership from one generation to the next, acquisitions of other advisory businesses and buyouts of retired or inactive shareholders.

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(4) Comments
You're going to die!

Ominous isn't it........... but sadly a reality.

At my old custodial employer..........so many times I remember taking calls from the actual client saying their financial advisor passed away and did not know what to do. Sadly these client accounts were simply moved to the ''retail side'' of the brokerage firm I worked with. The LPOA (Limited Power of Attorney) the advisor had on the account was simply revoked/removed, the account number was changed to a retail account, and the client was left to fend for themselves.

One option is advisors (baby boomers especially) should consider taking on a GenY (or GenX) planner for that just in case moment. It'll help with the succession and business continuity arrangements.

.............. just my .02 cents...............

Posted by MARTY M | Friday, February 21 2014 at 8:44AM ET
It is time for "Practice what you preach"! Nothing can be better than demonstrating to the client that you know your job, if you are successful in implementing a succession plan. A good manager is one who builds up a team and leaves clear instructions on how things are to be addressed in different scenarios. The same is true of a financial planner, more so. You owe it to the client who has trusted you with his hard-earned money that you pass on the mantle to responsible shoulders. Let this be a wake-up call to all.
Posted by KIMMY B | Friday, February 21 2014 at 10:14AM ET
Exit and transition planning is an art and a science. Much about human behavior is what drives the process. An RIA might be far better off to engage the services of professionals that specialize in this area, particularly succession for RIA's. This is the process that we recommend: Most RIA's for the most part are family and privately owned businesses. 4 written plans are required. Owners plan, company plan, family plan(s) and then the succession plan. Then each plan requires addressing 2 dimensions; the hard side and the soft side components. All of the measuring and communication will vet out a well structured exit and transition.
Posted by MICHAEL C | Saturday, February 22 2014 at 8:44AM ET
Not only has an individual or family given us their money to invest, but more importantly have shared their personal issues and desires. That is very hard to carry on to another advisor, especially some one they don't know. I'm with Kimmy, build a team. We have four in our firm and our clients meet with at least two of us each time, some on a rotating basis, and know they can talk with any one of us. We are from 40 years old to 66. It's a nice spread in age. As to succession planning for my firm, my team would buy the firm over time. Cash flow is released to me over time rather than only at the end. Perhaps that woudl be a good plan for any one that is afraid to let go all at once.
Posted by Deborah S | Saturday, February 22 2014 at 7:13PM ET
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