Many financial advisors confuse succession planning with selling their practice. This article explains the difference and explores the benefits of a well-crafted succession plan.
Over 90% of independent financial services and advisory firms will not survive their founders’ retirement or the end of their individual careers [1]. Succession planning solves this problem.
Succession planning empowers you to build a stronger and more long-lasting practice. You maintain control over your business while gradually transitioning to working smarter, not harder. It is about reaping the financial rewards of your career for years to come.
Succession Planning vs. Selling
Selling your practice to a larger firm can be viable, but it’s not the only way out.
Planning is often mistaken for simply having ideas or thoughts about future actions. However, in most cases, “that time” never comes. The immediate benefits of cash flow are prioritized, leading to delayed retirement. As a result, the practice dies on its own as you age and spend less time, energy, and money running it. At that point, nothing of substantial value is left to sell or plan with.
Succession planning focuses on building a lasting business and transitioning ownership and leadership internally to the next generation of advisors. This approach allows you to:
- Retain control: You continue to guide the business while gradually involving younger advisors.
- Maximize value: A well-planned succession can significantly increase your practice’s value compared to a simple sale.
- Work smarter, not harder: As the business strengthens, you can delegate tasks and focus on strategic initiatives.
- Secure your future: A successful succession plan provides financial security throughout retirement.
Why You Should Create a Succession Plan Now?
There are three key reasons to start succession planning now, as Acquatio’s experts suggest:
- Maximize Lifetime Value: Your practice is likely your most valuable asset. Succession planning helps you extract maximum value from your years of hard work, often at favorable tax rates.
- Attract Top Talent: A clear succession plan makes your practice more attractive to talented advisors seeking career growth and ownership opportunities.
- Protect Your Legacy: Succession planning ensures that your clients receive uninterrupted service, and your business continues to thrive.
Building Equity Value
Independent advisors have a unique advantage over captive advisors: they can leverage cash flow and equity to build a valuable business. Cash flow represents your current income, while equity reflects the long-term worth of your practice.
A succession plan allows you to:
- Grow both cash flow and equity: The plan helps you attract new clients while increasing the overall value of your business. “Advisors work for cash flow; equity is what owners invest in” [2].
- Benefit from multiple ownership: A team of younger advisors can gradually buy into your practice, offering a lucrative exit strategy and perpetuating income for you.
If you give it the time it deserves through early planning, an internal ownership transition can yield a multiple of five to seven times the starting point (based on the last 12 months revenue), not including wages and benefits over the course of the plan. Acquatio can help you navigate this process with our Transition Services.
Recruiting the Next Generation
As an independent owner, you must understand that succession planning relies on attracting talented young advisors. Here is how it works:
- Teamwork over competition: Instead of hiring “another you,” focus on building a team with complementary skills. According to an online survey conducted in early April by the Maru Group on behalf of Meridian Credit Union Ltd., there are certain qualities that clients believe are necessary for a successful transition to a new advisor, such as integrity, patience, understanding of the client’s goals, and caring about a client’s financial future. These are relationship-based skills. So, when a retiring advisor is looking for a successor, it is important to match them with someone who excels in these skills so that their clients can feel confident about the transition.
- Career and ownership: Offer a compelling package with a rewarding career path and ownership opportunities.
- Mentorship and collaboration: Become a mentor to younger advisors, fostering a collaborative environment.
A succession plan goes beyond retirement. Sharing your knowledge cultivates a team of advisors invested in the firm’s success rather than just individual growth. They should be collaborative partners rather than competitive former staff members.
Preserving Your Legacy
Entrepreneurs are not invincible. Therefore, having a well-defined succession plan is crucial to safeguarding your business and clients in unforeseen circumstances.
- Continuity planning: This initial step guarantees that your clients will be taken care of in case you are temporarily absent.
- Internal ownership: Having co-owners invested in the business provides the best continuity plan as they have a personal stake in its success.
Ownership stakes foster a collaborative partnership, regardless of percentage. An internal ownership plan is the most effective continuity strategy. Consider this: a co-owner invested in the company’s success becomes a natural guardian of its value and relationships, ensuring its continued prosperity during your absence.
Commenting on the Maru Group survey results mentioned above, Robert Coruzzi, associate vice-president of wealth distribution at Meridian Credit Union in Toronto said advisors tend to underestimate how long it takes to implement a succession plan. They need to engage clients in these conversations early and often, starting at least a year to 18 months before retirement. Clients are going to have questions and concerns about this transition period and making them feel part of the process is key.
By starting a succession planning today, you can ensure a smooth transition and continued success for your practice.
Acquatio’s expert guidance can help you understand the best choices for your firm and the costs and benefits of implementing each one.
References:
[1] FP Transitions. (2021). Succession Planning for Financial Advisors.
[2] Grau, D. (2018). Succession Planning for Financial Advisors. John Wiley & Sons.
