Why Is Your Succession Plan Last on the To-Do List?

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Most, but not all, financial planners list small business planning and exit strategies as a line item in the scope of planning services they provide. Better operational, financial, and tax implications of proper exit strategies for small business owners, a common niche for many financial planners, will inevitably lead to improved client satisfaction, retention rates, and even an increase in referrals. What’s surprising is that while financial planners care very much about the transactions involving their clients’ businesses they tend to neglect their own business exit strategies.

Perhaps this is because most financial planners don’t see their financial planning practice as a business, but rather as a lifestyle – a career with great personal satisfaction helping others achieve their goals and doing everything they can to reduce stress in the lives of their clients. It’s almost as if financial planners wear their financial planning caps when meeting with clients and working late hours developing financial plans, but somehow misplace their financial planning caps when it comes to their own practices’ strategic planning.

According to a whitepaper published by FA Insight and TD Ameritrade* in early 2018 the reason there’s no urgency on the part of RIA owners to put a succession plan in place is simply because it’s hard – so hard in fact that even though a blanket awareness, industry pressure, and regulatory scrutiny have increased, adequate succession plans from 2015 to 2017 have declined from 43% to 37%. What skews those statistics is that they include the larger RIAs which generally have adequate succession plans due to multiple partners and capable staff. If you isolate RIAs under $500k in revenue only 19% of the smaller RIAs have adequate succession plans in place. The time and strain of resources it takes to even attempt a succession plan is a daunting task for a sole proprietor or even a small ensemble because they are consumed with their day-to-day responsibilities and succession planning always seems to be last on the list of things to do.

The reason there’s no urgency on the part of RIA owners to put a succession plan in place is simply because it’s hard…

FA Insight and TD Ameritrade report that 69% of RIAs of all sizes prefer an internal succession plan, which makes sense because it is the most seamless for clients and has the highest client retention rates. Unfortunately, many advisors, even if they can find the time, lack experience when it comes to finding and vetting an appropriate successor, negotiating value and deal terms, structuring the transition, and overcoming the roller-coaster of emotions involved in one of the most important aspects of their professional and personal lives.

Since 2013 Pinnacle Advisor Solutions has developed several options assisting advisors, young and old, with contingency planning and transition planning in the event of permanent disability, death, or an eventual voluntary retirement. Take for example our most recent success story. Through our Ascend program Pinnacle was able to facilitate an internal succession for one of our Strategic Partners. The owner was a CFP® practitioner as well as a CPA in her early seventies and she desired an internal succession plan as opposed to Pinnacle just absorbing her client base. Pinnacle, acting on her wishes, recruited, interviewed, and vetted several candidates looking to start their own firm until the right successor was agreed upon. Pinnacle, the retiring advisor, and the successor met several times to confirm the successor was the right fit for the retiring advisor’s client base and after a few back and forth negotiations the valuation and terms were agreed upon. With Pinnacle acting as an intermediary and third-party consultant guiding the negotiations and regulating emotions the transaction was a success.

. . . only 19% of the smaller RIAs have adequate succession plans in place.

The younger advisor, leaving his existing firm which provided him no path to ownership, is extremely excited to hit the ground running with an already highly efficient firm that is supported by Pinnacle’s Strategic Partnership program. This means that the successor doesn’t have to worry about investments, financial planning research, back-office operations, technology, compliance, or practice management consulting as they are all covered by the existing Strategic Partnership with Pinnacle. The advisor can instead focus on his new client relationships and spend time learning the ropes from the retiring advisor during the transition period. Also, the retiring advisor’s payout will be facilitated by Pinnacle through the billing services with the Strategic Partnership program.

There are a host of factors that go into the sale of and exit from a financial planning firm – most of them are technical and negotiable: valuation, terms, down payments, promissory notes, earn-outs, stock sale or asset sale, revenue sharing, consulting arrangements, percentage goodwill vs. intangible assets, tax treatments – seller favorable or buyer favorable etc. The most important factors are clearly subjective and non-negotiable – trust and confidence. Trust and confidence that the successor has the planning expertise and the entrepreneurial spirit to successfully run the RIA and care for clients as they should be cared for. And trust and confidence that Pinnacle’s Strategic Partnership will continue to support the new RIA owner with the infrastructure, resources and guidance required to run a successful RIA and provide superior service to clients for years to come.

*FA Insight TD Ameritrade Institutional Benchmarking White Paper Succession Planning: Beyond Ownership Transition, It’s a Smart Human Capital Strategy 2018

About the Author

Tim Mascari

Tim MascariTim is Associate Director of Strategic Partnerships and heads Pinnacle's continuity and succession planning program.View all posts by Tim Mascari →

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