As sure as the fact that today you are a financial advisor, some day you will leave the business. And the wisest course of action is to prepare for a succession plan years before you leave your practice.

A good succession plan will allow you to extract the value you have created in the practice and decide when to walk away. For many advisors, their practice is an extremely valuable asset. Hopefully, you will leave your practice on your own terms, how and when you choose. To help you in your succession plan and receive the maximum worth for your practice, below are five recommended actions to take.

Planning Ahead

First, it's best to begin your succession plan at least three years in advance, but five years is preferable.

I have seen different methods of determining the value of a practice. Do you know exactly what your practice is worth? That is, what dollar figure is someone willing to pay for it? If you are selling your practice in a raging bull market, potential buyers may be flush with cash and a bidding war may ensue. If you are selling during a devastating bear market, you may need to severely discount what you obtain because buyers may be in a cash-flow crunch. The sooner you start planning a way to increase and then protect your practice value, the better.

Different Types of Capital

The second step to building a solid succession plan is to understand the value of your practice in today's market. Inside your practice there are different types of capital of different values.

  • Financial capital is a combination of the assets you manage and the revenue your business generates.
  • Human capital is the value your staff and support team bring to the practice. As it turns out, most advisors don't learn the true value of human capital until they lose a key staff person.
  • Intellectual capital is the value of what you and your staff know that your clients either don't know or don't have time to implement. How many licenses, designations and continuing education credits have you and your team obtained that allow you to provide value to your clients? What unique and proprietary systems do you use to provide service and advice?
  • Social capital is the value of the relationships you and your team have developed with clients.
  • Psychological capital is the worth of not only what you do, but also how you approach what you're doing. Do your clients look forward to coming in because of the positive energy exuded by you and your team? Can that positive experience be captured in simply a monthly statement? It is not only what you do, but how you do it that can impact your practice's value.

Unfortunately, most financial professionals calculate only the value of the financial capital in their practice when designing a succession plan.
At the end of the day, if the person you relinquish your practice to focuses on just financial capital and doesn't replace those other types of capital as well, what will happen to the value of the financial capital? How would someone evaluate their investment in your practice if he can't reap all the benefits? What would you think about not being compensated for the value you have created in those other types of capital? Not good, I would imagine.

Now let's discuss calculating this value. The most common approach to calculating the financial value of a practice is by taking your trailing 12 months of recurring revenue and multiply by two. Then, take your trailing 12 months of nonrecurring revenue and multiply by one. Next, add the numbers together. Now will this magic formula apply to your situation? I can't say it will or will not precisely, but it will give you a ballpark figure to begin your calculation.

Now let's discuss the value of your human capital. Start by adding up the total cost of payroll from your pocket. If your broker-dealer is subsidizing your payroll expense, then this number may be as low as 0. Next, remember that an employee has a bundle of competencies each of which needs to be valued. Are they beginner level at these tasks, intermediate or expert?

Finally, what will it cost you to replace someone who can execute the needed competencies at the desired level of expertise? How does the cost of replacing your staff compare to your current payroll? Will any of the needed competencies lost during the transition transfer from one team to another? What is the value being lost? If these needed staff people or competencies are being transferred to your successor, how will you be compensated for that value? If your staff is transitioning, how many hours have you spent training them? What is that worth to the succeeding advisor?

What about the value of your intellectual capital? Do you have proprietary client service systems? What about sales and marketing systems? Do you have proprietary money management or financial planning systems? If you do, what is the value they have added to you or your clients? You need to capture the intellectual capital of yourself and staff in a knowledge profile and transfer it to your successor. You should be compensated for your intellectual property, accordingly. Some advisors have created entire businesses around the selling and reselling of their intellectual capital. Can you? Should you?

Next, you need to transfer your social capital, the relationships you have with your clients as part of your succession plan. If you are a solo practitioner who leaves, why should your clients simply move to your successor, instead of seeking out someone that they choose themselves? You need to bring in your successor well in advance (in fact, years beforehand) before you leave, so they can begin the process of developing their own relationships with your clients. What is the value of keeping clients after they have succeeded you? It is priceless in my view, compared to the value if they leave, which, of course, is nil.

Finally, what is the value of you and your team's psychological capital or, if you will, mojo? My guess is that many of you didn't know that it can be measured. In his book Psychological Capital, Fred Luthans, Ph.D., includes a simple questionnaire that measures psychological capital or PsyCap. An improvement of as little as 1% to 2% can improve staff productivity by as much as 10%.

What is the value you place on you and your team's ability to inspire your clients? The good news is that your successor can measure his or her own PsyCap. If it is not up to your standards, begin to work with your successor on improving it. How much should you charge for a PsyCap, or mojo, training program? What is it worth to your successor to improve his or her team's productivity by at least 10%? Emotional competency in financial services is essential to building and keeping solid client relationships.

Growing Value

Now that you have assessed the value of your practice, the third step is to grow that value. First, start implementing more recurring revenue strategies. Next, have your staff complete a knowledge profile to capture what they do and how they do it. Can you improve these processes in the future? If so, make sure you capture the improved processes, too.

Plan on bringing in your successor early for two reasons. First, to begin building those good relationships as soon as possible, second, to be able to step up if you need someone to fill in for you on a temporary basis.

Exit Strategy

The fourth step in your succession plan is deciding your exit strategy. Do you want to relinquish control of all your clients in return for financial compensation? If so, do you want a lump sum, a partial payment upfront and the balance over time? Do you want a revenue split for a certain period of time? Thinking about how to structure a compensation model can help your successor begin to put a payment plan together in advance. Another option is relinquishing control of a portion of your practice and keeping some clients. Maybe you still want to work a few days a week; that's fine, too.

The Final Step

The fifth and final step is to execute your succession plan, cash in your chips and begin doing something else, whatever that may be. If you have questions about how to put together a knowledge profile or institute a PsyCap training program, feel free to contact me.


Todd Colbeck is principal and founder of the Colbeck Coaching Group,
a subsidiary of General Business Center, Inc. You can reach him at
this email address.