I feel like every spring there is renewed focus on an advisor’s succession planning (or lack thereof) in the trade press. This year is no different. And, as in years past, a key statistic remains unchanged – most advisors lack a plan either for protecting their clients if something unexpected were to occur, or for transitioning their firm when they are ready to leave the business. In fact, only 13% of advisors managing less than $50 million in client assets have a formal plan in place.*
In a recent study by the Financial Planning Association and Janus Henderson Investors, one finding that strongly resonates – the correlation between having a succession plan and the advisor’s own plan for their retirement. For advisors with a succession plan, 22% say they are absolutely clear about their own retirement plans while only 4% of advisors without a succession plan say they are absolutely clear about their own retirement plan*. Clearly the two are tied very closely together almost to the point of being interchangeable, especially for a solo practitioner.
This comes as no surprise to us. While we don’t track the numbers, anecdotally we do see a similar trend in our discussions with advisors. We regularly field calls from advisors who are beginning to think about retirement but don’t know where to begin, or even know if they really want to retire. In fact, we recently surveyed the advisors with whom we have a PRISM Continuity agreement. One response we received to “How many years will you continue to work before retirement?” was actually “Not going to retire”. That advisor is 77.
We have also learned that succession planning in preparation for retirement can take several years. This time is necessary not only for the advisor to get into the right frame of mind, but also to get your firm financially and structurally ready for transition. At Pinnacle, we have found that there are three phases required for a successful transition to an outside firm, either as part of a purchase or an LBO by others in the practice.
The first is to transition the management of client portfolios. Investment management is one of the biggest time consumers in an advisor’s day. When the markets are calm, the investment piece of the pie takes up much less time. However, when the market turns volatile, investment management can be a full-time job and more. When transitioning to an outside purchaser, your investment philosophy, as well as the mechanical infrastructure, trading accounts, holdings transfer, every specific instance of every piece along the money path, has to transition smoothly in an integrated fashion. That takes time and energy.
The second phase is to transition the management of your back office tasks. No two firms are exactly alike, especially in terms of back office processes. There is a significant amount of time needed to migrate client data to a new CRM and portfolio management software, and to set up reporting and billing. That migration process can take a year or more depending upon complexity of your structure and your CRM. Sometimes the two systems will need to work in parallel for a while before dropping the old one.
The final phase is to decide on a successor and to transition client responsibility to the new advisor. This can be the most daunting phase. In the FPA/Janus Study, 51% of advisors said that finding the right successor is the biggest challenge to formulating a plan.* It doesn’t have to be. There are options available to advisors in need of a successor. For those of you familiar with Pinnacle Advisor Solutions, you know that we have been long time proponents of succession planning, and have a solution of our own. Our solution has expanded over the years, as we have talked to more and more advisors, and have a greater understanding of their needs. We understand it is difficult to find the right person for succession. To help make that easier, we added the ASCEND program to our solution offerings and have been successful recently in helping one advisor select her successor, negotiate the sale of her firm, and are working with them to fully transition the firm. That process took less than six months, because she had already outsourced the management of client portfolios and transitioned the back office separately in preparation for retirement in a long-range plan .
Everyone knows the importance of having a succession plan, and we all recognize the obstacles advisors face in putting a plan in place. We also know that those obstacles are surmountable, if you take the time to build all the preliminary pieces necessary and have a long-range plan.
*Financial Planning Association Janus Henderson Investors The Succession Challenge 2018 – Why Financial Advisers Are Failing to Plan for the Inevitable