Why shock-and-awe over low succession planning rates is unhelpful and distasteful

Todd, you make many good points. But who’s thinking about the clients here? They deserve to know that their advisor has a smooth transition in place, one that will protect their interests and their assets, when the the advisor no longer can or wants to work (and those two are quite different)!

Hi Marion,

I think it’s always good to look at these issues with the clients in mind. But there is always a cost-benefit in
these circumstances. Just how much emphasis should be placed on this issue and at just what point do advisors embark on this giant effort? (I don’t know the answer.)

Are the various parties pressing the succession case doing so because of concern for clients? (I have my doubts.)

What is the worst thing that can happen to a client if their advisor dies? (I’m really not sure but I assume that the assets continue to live.)

In editing this article, I asked myself what firms have fantastic succession plans in place. One that came to mind was Evensky & Katz. But Harold is also still around!

thanks for sparking thoughts,

Brooke

Todd, Well thought out and written piece. I think the conversation is a little more complex due the different sizes of firms, valuations, owner’s family goals etc.

Where I do think you are generally spot on is that advisors typically really enjoy the business and the lifestyle it provides them. I don’t believe that many advisors actually want to cash out and walk away. However, many may wish to “take some chips off the table” as their business represents a large percentage of their net worth. They may be thinking multigenerational estate planning for their own family.

Finally, many advisors do think about their legacy and would like to have a business that lives beyond their lifetime. They would like to move from successful to significant. They do not simply want to ride the annuity of their current client revenues and have the business dissipate when they are no longer involved.

Best,
Matt

Todd,

I read your viewpoint on this issue with great interest, congratulations on pointing out many of the fallacies of the current pandemic spate of “succession” planning pitches. I knew your father for 25 years and he was always a gentleman and consistently brought a unique view to the industry. My issues with the current mania over succession planning are much the same as yours with one additional note. I’ve counseled 100’s of advisors over the years on succession planning and the biggest issue is usually finding someone you trust will treat your clients the way you want them to be treated. It’s relatively easy to find a “buyer” for a practice, but is it someone you and ultimately your clients are comfortable dealing with going forward? I hate to admit it, but sometimes I think the legal profession has shown us the way in this regard. Years ago I went to lunch with a friend of mine who was a partner in a large firm. When I walked up to their door his name was listed along with all the other attorneys, but after his name it said “Of Counsel”. At lunch I asked him what that meant and he replied that he went to lunch a lot! He wasn’t retired, he was a rainmaker and a relationship manager which he was able to squeeze in between lunches, golf and travel. This is why I’m such a proponent of fee based business because if you do it correctly, you’ve funded your retirement income stream with just a fraction of your practice. No need to sell, no need to liquidate, no need for a shotgun wedding to a roll up firm if you choose not to do so. We all try to keep our clients options open, we should be more open to not painting ourselves into a corner either! Thanks, Todd, great viewpoint!

Hi Brooke,

You have asked some interesting questions. Let’s start with “What is the worst thing that can happen to a client if their advisor dies? (I’m really not sure but I assume that the assets continue to live.)” In most cases, nothing would happen. But the worst thing is that the client has a life event or the market crashes while the custodian is sorting out the practice—because the advisor was a solo practitioner with no succession plan. There is no trusted person who knows the client well and can provide guidance when it is needed most. That is a pretty bad situation for the client.

And let’s take a look at Evensky & Katz. They have done everything right, including executing a well-thought-out succession plan while they are around to ease their clients’ transition to advisors they ALREADY trust, because they know them! Evensky and Katz designed and executed their plan over time, with their clients’ interests in mind as well as their own. That is the way it should be done.

You don’t start your succession plan when you need it, but long before. It is a huge effort but a worthy one, and execution takes time. And you should have a contingency plan in place, which covers your clients in case of an accident, illness or other catastrophe, the day you open your door.

As for the other question, I don’t know the answer either. There are always interested parties but that doesn’t mean they don’t have something valuable to say. It’s up to the reader to decide.

thanks and warm regards,
Marion

Succession planning presumes that client relationships are transferable from a founding advisor to a successor. As we all know very few advisors have (1) a consistent comprehensive value proposition that (2) make their practice scalable, (3) establishes professional standing (based on statutory requirement entailed in fiduciary duty), (4) have achieved a functional division of labor which supports the highest level of technical competency and client service, (5) effectively manager their margins (6) so that the professional relationship with the client is institutionalized that makes it possible to establish transferable value in their practice. The client is buying the skillfully executed financial services provided, not the sales ability of a broker.

The fact is that an advisor has created privileged client information over the years that allows the advisor to add value in ways not otherwise possible by any competitor coming in anew. It is because a high level of expert counsel has been institutionalized that creates transferable value in a advisory practice. Brent Broadeski, Ric Edelman, and a very small number of exemplary practices have control over their value proposition, cost structure, margins and professional standing. This is why the future is large RIAs becoming gigantic while broker/dealers thwart all efforts to make advisory services a profession that is built around ongoing accountability for recommendations.

Not every advisory practice has transferable value thus an economically viable succession plan, but some advisory practices have achieved transferable value. The succession plan without the ability of the advisor to sell extraordinary technical competency in the full range of financial services has little transferable value in the context of continuous comprehensive counsel required for professional standing and fiduciary duty in the client’s best interest. This is largely not possible in a brokerage or custody format—it requires an extremely well run RIA which is both responsible and accountable unlike a broker/dealer or custodian.

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Marion,

All good, legitimate thoughts.

We all seek to walk that fine line between taking good advice and caving in to moral blackmail (so to speak). With experience, moral authority, original research and the willingness, courage to think in non-linear fashion, I think Todd has helped us better understand where that line runs in this discussion. I like the fact Todd errs on the side of the 80% of advisors who supposedly don’t have a plan and trusts that there’s a deeper message there than inertia, confusion and procrastination and that we need to dig for it.

thanks again,

Brooke

This is an interesting article, and well written, but it makes a common mistake in this industry of equating selling a financial services or advisory practice with a succession plan. They are very different avenues, and have different purposes.

The company I work for, FP Transitions, has now formally valued over 5,600 practices and businesses and firms (we use the different terms purposefully and have a specific definition of each), sold another 1,000, and have set up formal succession plans for almost as many. In our experience, this is how we define a succession plan: “A succession plan is a professional, written plan designed to build on top of an existing practice or business and to seamlessly and gradually transition ownership and leadership internally to the next generation of advisors.” Selling a practice can be an excellent exit strategy, but let’s be clear – selling to a buyer through an asset sale or, even worse, a revenue sharing arrangement, brings your practice to an end. That is not a succession plan.

Succession planning is about building; it is about investing in the next generation to strengthen your own practice and to help grow it into an actual business or firm that can serve your clients and their children and grandchildren. Succession planning for most of our clients means retiring on the job and evolving in skill sets from entrepreneur to shareholder to CEO to mentor. That is a good thing for advisors, for their clients, for their IBD’s or custodians, and for this industry – that is the real reason behind “the hype” that Brooke mentions in his note above. In my thinking, while there is a lot of noise and hype, most of it is inaccurate and unfocused. This young and growing industry needs some clear direction and accurate information – starting every practice from scratch and building small, perishable “books of business” cannot be the future of this unique industry. As a client of an investment advisor, I would never put my money with a practice built to die at the end of my advisor’s career. It is just a matter of time until the captive side of this industry starts beating this drum – one generation practice models are the independent’s Achilles heel.

This past winter, with the help of my colleagues, I wrote a book called “Succession Planning for Financial Advisors: Building an Enduring Business.” You’ll be surprised at some of our findings, but we have the data to back up our conclusions. The surveys that report that 20% or 30% of advisors have a succession plan are sheer nonsense – we work with advisors (registered reps, RIA’s, etc.) with up to about $10 billion in AUM and I can assure you that most “plans” are either an attorney’s buy-sell/shareholder agreement (seriously, you really shouldn’t need to die to trigger your succession plan!) or the notion that “I’ll sell my practice in 5 years.” Our experience is that about 8% to 10% of advisors will ever sell their practice, but 5 times that many think they will and as a result selling becomes a recipe for procrastination and it stops the building and planning process. In the end, attrition is the no. 1 exit strategy actually utilized by independent advisors and that should not be acceptable to any of us.

Finally, lawyers and law firms are not a good example to follow. Independent advisors have recurring, predictable income that generates predictable overhead. Expenses are typically much lower for advisors, and growth rates are higher than in most law firms (disclosure: I am a former attorney). Advisory practices are more valuable and more resilient than any other profession services model we’re aware of. All this adds up to a very unique opportunity and proposition for advisors to plan and build something that can outlive them – not hard to do, but it does take time and good information, something that too often is sorely lacking in this industry. Learn more before you make a decision about your future and that of the practice or business you’ve built. Challenge yourself and everything you think you know about succession planning in this industry because I suspect most of it is wrong.

Todd, thank you for your article. As a fellow writer, I know how much work it takes. Your ideas and words have people talking and that is all a writer can really hope for. Best wishes.

David Sr.
FP Transitions

Thank you for the thoughtful comments, this article was fun to write and I appreciate RIABiz giving the topic its due. If its ok, I’ll respond to two commenters in one box:

Marion:

You are absolutely correct that the clients (and staff and family) deserve to know what the advisors succession plan/continuity plan is. As a fiduciary, the advisor has the obligation to make sure that his or her clients’ portfolios are taken care of well beyond the advisor’s life. Communicating the continuity plan to the clients should help to ease the client’s fears, increase their confidence, and potentially attract the next-gen assets.

Matt:

While succession planning may ultimately mean that the advisor sells his business to an aggregator, it isn’t the only answer. My point is that the answer to succession planning is as unique as the advisor’s practice. I’m all for advisors selling their practice or taking chips off the table if that is the best, most appropriate answer for their individual situation. Industry experts are painting the picture that selling one’s practice is the ONLY answer. I just think there are other answers to look at when addressing the complex issue of succession planning.

Thanks all,
Todd