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For financial advisors, the focus is often on growing their business, not passing it on to new owners.
However, succession planning should be a key consideration in running a financial advisory firm, experts say. Yet research shows that most firms don’t have a plan in place — which could leave clients and employees in the lurch.
“It’s definitely important if you want to have a firm that is sustained beyond the working life of the founding principals,” said certified financial planner Dan Kern, chief investment officer and shareholder at TFC Financial Management in Boston. The firm ranks 69th on the CNBC FA 100 list of top financial advisors for 2021.
“Otherwise you build a business, do a great job, then it’s time to retire or someone passes away, and either the business falls apart or you’re forced to sell,” Kern said. “Neither of those are typically good for clients or particularly good for employees.”
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While advisors are more likely to explore their options as they near retirement, 73% overall lack a formal succession plan, according to a 2018 study by the Financial Planning Association and Janus Henderson Investors.
Clients also should care if their advisor has a plan in place, experts say, because it impacts who will handle their money if the firm owner dies or retires.
“Most financial advisors don’t have a succession plan for the same reason [many] of their clients don’t have proper or updated estate plans,” said Brian Hamburger, founder, president and CEO of industry consultant MarketCounsel in Englewood, New Jersey.
“The notion of having a succession plan is inextricably linked to someone’s demise, so the thought of having to develop a plan really signals that they may not be here at some point in the future,” Hamburger said.
Most advisors without a succession plan recognize the potential perils of not having one: 54% see a significant risk and 41% see some risk, the FPA study shows. Also, 97% of them say they will create a plan at some point.
“The best-run firms think about these things at least 10 years out,” said Kern, whose firm is working on its second succession plan. “Sure, your plan may change in a variety of ways over a 10-year time horizon, but having more time rather than less time is a recipe for a better outcome.”
Depending on a firm’s structure and size, it can make sense to look at internal succession. That is, you cultivate talent at your firm so that when the leader (or leaders) are ready to step away, the next generation is ready to step in.
At North Star Asset Management in Neenah, Wisconsin, that transition is underway.
“Basically the younger people in the company are slowly accumulating shares,” said Mike Flesch, president and managing director of North Star, which ranked No. 8 on the FA 100 list.
Flesch, who is 64, said clients have asked what’s going to happen when he retires.
“I’ve got people I’ve worked with for 30-plus years,” Flesch said. “I’m going to be 65 years old soon and everyone eventually retires.”
As for sharing your succession plan with potential clients without being asked, it’s “a fine line to walk,” said Kern at TFC.
“New clients don’t want to hear that you’re already planning your departure, but they want to know there’s a deep bench,” he said.
Not all financial advisors who do succession planning go the internal route, which requires both employees who have the skills to lead the firm and, perhaps, the financial wherewithal to buy in.
For smaller operations, the lack of a succession plan is more acute: Just 13% of advisors at firms managing less than $50 million have a formal plan, compared with 60% of those at firms with $500 million or more in managed assets.
For those smaller firms, one option is basically to team up with another small operation.
“Quite often it’s as simple as finding another like-minded advisor… and essentially creating a reciprocal plan with each other,” said Hamburger at MarketCounsel.
“It’s a way small advisors can cover one another,” he said.
There is no federal requirement that advisors have a succession plan in place. At the state level, though, advisors might have an obligation for a basic plan.
At least 15 states require a plan, according to the North American Securities Administrators Association.
In 2015, the group created a model rule — which states could adopt — to require registered investment advisors to have business continuity and succession plans in place that minimize “service disruptions and client harm that could result from a sudden significant business disruption.” In November 2020, the group adopted a broader model rule that encompasses more, although there’s no word on when states may use it instead.