RIAs must confront the emotional side of letting go of their business

Sole proprietors have the hardest time with succession planning

Jun 28, 2017 @ 6:28 pm

By Jeff Benjamin

When it comes to succession planning, the financial advice industry is often painted with a broad brush as being woefully ill-prepared.

A closer look, however, shows that it is mostly those smaller, independent operators that stand out as being the least prepared for retirement.

The latest research from Cerulli Associates shows that of the roughly 118,000 advisers within 10 years of retirement, 44,000, or 37%, have no formal succession plan in place.

But because that particular adviser subcategory only represents about 22% of the total client advisory assets potentially subject to ownership transition in the next 10 years, it is sometimes viewed as a less urgent issue.

"The data does have a tendency to get overstated because it isn't often qualified," said Don Bennyhoff, senior investment strategist at The Vanguard Group.

"By total count, it is a large number of advisers who aren't prepared with a succession plan, but by assets it's actually quite small," he added.

By Cerulli's calculations, of the 118,000 financial advisers planning to exit the business in the next 10 years, 72,000, or 61%, have plans in place that include some form of succession, sale or client reassignment.

That group represents 75%, or $4.5 trillion, of the advisory assets potentially in transition, which compares with $1.3 trillion, or 22%, of advisory assets spread across the 44,000 advisers without a succession plan.

Such data might calm the nerves of some industry observers, but it leaves hundreds of thousands of clients vulnerable to tens of thousands of advisers like Julio Hoyos, a 54-year-old sole proprietor with 50 clients and $10 million under management.

"I currently do not have a succession plan, and I see the alternatives are very limited," he said. "I don't have colleagues that want to take over my firm, and my kids want to go out and do their own thing."

Mr. Hoyos, who works primarily with Hispanic clients in the Dover, N.J., area, plans to retire in about 10 years.

"The easiest way would be to find an adviser that shares my values and my interests, and feels the way I do about my clients," he said. "But there are some advisers that are basically just interested in making money and not helping clients. So, in the meantime, I'm just searching."

As much as Mr. Hoyos' situation could sound unique, some see the lack of a succession plan as a common problem among entrepreneurs, especially in the financial planning industry.

"When you're a full-time practitioner, succession planning is difficult to fathom when you have been the entire brand," said April Rudin, founder of the RIA marketing firm, Rudin Group.

"It's quite a process to find someone to replace yourself," she added. "And [while] advisers know how difficult it is for their clients to plan properly for the future, many of them are guilty of the same thing."

By most estimates, the average age of a financial adviser today is 51, but the more significant detail is that the average age of a firm owner is at least 61, according to David DeVoe, managing partner at DeVoe & Co.

"I'm more concerned about the age of the owners, because they are the ones closest to retirement," he said.

Todd Fulks, senior vice president of succession planning and acquisition at Advisor Group, spreads responsibility for the general lack of succession plans across the financial services industry, beyond just the advisers themselves.

"On the adviser side, I often hear that it's hard to find the right match, and they don't know how to structure a succession plan for their own circumstances," he said. "And on the industry side, I don't think the broker-dealers or custodians are doing enough to help them execute a plan. There's a lot that falls under the heading of succession planning, and advisers start to stumble because they can't figure it out."

One irony of an adviser not having a formal and well-developed succession plan is that it's not that much different than a client trying to prepare for retirement at the last minute.

"Most advisers do not practice what they preach," said John Napolitano, founder and CEO of U.S. Wealth Management, which has more than $700 million under management.

"There are a lot of sole practitioners and one-man-bands that have been too cheap to build a business infrastructure, and they think their business is worth more than it is. They are afraid of what they don't know, and they're also worried that their clients have never dealt with anyone other than them," he added.

Mr. Napolitano, 60, is in the first year of a five-year ownership transition that involves selling his business to IHT Wealth Management.

Last year, Mr. Napolitano said he spent $10,000 on a revocable succession agreement that he presented to 100 different advisory firms without succession plans. Only one firm accepted his offer to engage in a formal succession plan agreement.

"I'm betting 90 of those firms still have no plan in place," he said. "Not having a succession plan represents a grave disservice, and shows a low regard for your clients."

Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions, has also witnessed the psychological riddle of advisers postponing or ignoring the need for a succession plan.

"I guess it's human nature to put it off, and that's no different than the way advisers get frustrated with their own clients for putting things off," he said.

According to Fidelity's most recent RIA Benchmarking Study, 37% of advisory firm owners plan to exit the business in the next 10 years, and 73% of those owners do not yet have the next generation of owners in place.

"Most advisers see a succession plan as important, but not urgent, and it's very easy for busy advisers to just keep going and know it's something they should do, but they just don't' get to it," Mr. Slater said. "What I found very consistently is it takes some kind of trigger event for an adviser to really evaluate what will happen once they have a health concern or lose a couple of clients, or lose some key employees."

Donna Cuiffo, managing director at Clarfeld Financial Advisors, a $6 billion multi-family office, said it difficult to quantify the emotional connection an adviser can have to his or her firm, which she said plays a large part in delaying succession planning.

"At the start of any business, you're not thinking about succession, because you're wearing seven different hats, and not sleeping a lot, and constantly looking toward the next thing," she said. "But as you get older, clients will start asking about your plans and you better damn well have an answer, because you don't want to be caught flat-footed when they ask about your succession plan."

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