By Liz Milacek, Director, Partner Acquisitions

 

The financial industry has long been aware of an impending shift: the “great wealth transfer,” spurred by an aging population that has amassed vast resources. And as baby boomers move to their next phase of life, that crop of retirees includes many financial advisors as well. Roughly 20% of advisors are 65 or older, according to the J.D. Power 2019 U.S. Financial Advisor Satisfaction Study. Despite heading toward retirement, just over one-quarter of advisors report building a succession plan, finds a report from the Financial Planning Association (FPA).

Whether you are nearing retirement or understand the value in considering your future, you don’t want to rush your eventual transition. While succession planning for financial advisors entails working out a lot of details, one of the most important by far is whom you will select as your successor.

Often an internal candidate can be a logical and wise choice for selling a book of business for financial advisors, based on their knowledge of the firm and familiarity with your clients and approach. If you get on well with your colleague and have a close relationship, you might be inclined to consider them first – but that doesn’t mean they necessarily have what it takes to carry on your legacy. Here are four criteria you should be thinking about when building a succession plan with an internal candidate in mind:

1. Do You Have Similar Cultural Priorities?

This should be the top factor in your appraisal of succession planning for financial advisors. Take time to observe them in action: Do they work well with your team? How are their interactions with clients? What is their vision for the firm? Do they have a niche market or preference for the type of client they serve?

In addition to your own observations, talk to your internal business development team for their impressions. You also could see if you have a mutual external contact to whom you can reach out for their honest evaluation.

Whenever we consider any new hire, we also use a personality test. In our case, we use DiSC®, which measures four personality profiles: dominance, influence, steadiness and conscientiousness. Keep in mind the eventual result doesn’t have to match yours; in fact, many advisors find someone with a different skill set can provide a more dynamic environment in their business.

Incompatible culture profiles are often a top dealbreaker, though you can cultivate specific areas that fall short. Younger professionals, for example, often need mentorship to improve their ability to nurture a positive workplace. This is just one more reason to start considering intended successors early so you have more time to coach.

2. Does Their Timeline Align with Yours?

Timing is everything, as they say, and such is the case with selecting your internal candidate. Base this decision on your retirement plan: Are you looking for a slow sunset or do you have a defined, non-negotiable date?

You’ll want to assess whether your potential successor has the capacity to absorb your clients and whether their goals align with your ideal timeline.

When selling a financial advisor book of business, think about structuring the financial advisor succession agreement in a way that works for you. If you prefer a sunset retirement, for example, allowing the advisor to slowly buy you out over time is a great option. With an internal successor, this could take the form of a reduction in salary or payout. But if you’re eager to embark on your next phase with a trip around the world, you may be looking to cash in with a full sale to realize a larger sum upfront with trails based on retention.

Typically, an internal successor candidate tends to be younger and not yet have adequate financing. Fortunately, this doesn’t have to be a dealbreaker when building a succession plan. There are partner companies, including Carson, that can step in as a minority equity partner and help the next generation with financing. This could help ensure you get the right financial advisor succession agreement in place over a timeline that works best for you.

3. Do They Have a Healthy Business?

You may have noticed we haven’t mentioned length of tenure and designations as criteria. Of course, those matter, but we find if an advisor has their own healthy book of business under your company’s umbrella, they are likely to already have those skill sets and achievements. Here, you’re looking for a business with efficient and scalable operations in building a succession plan.

When evaluating the health of their business, it’s easy to focus on the big, splashy numbers like assets under management or the number of households they work with. However, those are not the only or necessarily the best indicators of the business’s well-being.

The key factor is growth. You don’t want to see their business declining through loss of assets or clients. In addition to looking for organic growth in net new assets, you can investigate their profit-and-loss statement to see how they operate. For example, it could be a red flag if they are running excessive personal expenses through their business.

This is an area that could be a dealbreaker, depending on the depth and breadth of any worrisome issues you see.

4. Do They Have a Similar Investing Philosophy?

An internal successor will presumably have much in common with you in their approach, such as a similar philosophy and investment selection. This commonality can be a big factor when selling a book of business for financial advisors, as it helps minimize potential tax gains and prioritizes consistency for your trusted clients.

Any time you go through a transformation, take a deep dive into your own clients and their portfolios, which offers an excellent opportunity to assess what they need.

Most notably, with a wide shift in philosophy, your clients could face tax consequences, and you should find a succession plan that minimizes this risk.

On the other hand, clients can often benefit from the new perspective your successor might bring to the table. Legacy clients in particular might be facing high taxes from their gains, given stock market growth. Many new investment protocols focus solely on tax mitigation, and a successor advisor could have fresh approaches that would allow your clients to unwind some of the tax burden.

So, you’ll want to evaluate your clients and ensure any changes would benefit them. While switching investments can be a positive, remain very focused on suitability, costs and clients’ personal preferences, such as holding ESG investments.

Succession Planning for Financial Advisors: Is an Internal Successor Right for You?

After carefully evaluating potential candidates when building a succession plan, you might discover there are too many hurdles. Fortunately, other options are available. If you feel the internal advisor is not ready to take over the business, merging with another firm with a longer timeline could be ideal. Consider partnering with a firm like Carson that has a strong M&A team and resources available to help train your advisor, offer additional solutions to structuring a deal or find an alternative.

While transitioning your business may sometimes feel like a second job, having a succession plan in place is well worth it – the FPA’s report found 92% of the advisors who had a succession plan felt either somewhat or very prepared for the changeover, compared to only 41% who didn’t. Why not start to confidently prepare your succession plan now so you’ll be ready to enjoy retirement when the time comes?

Your business is one of your largest assets – and knowing its value is critical to identifying your growth potential, finding equity options, preparing you to sell, finding a capital partner and more. Use our firm valuation calculator today for insight into your business.

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