Financial advisors ignore succession planning at their own peril

Experts detail the nuances of navigating ownership transition plans, and it's rarely a straightforward and easy path.

There is perhaps nothing more constant in the financial planning industry than the talk of an aging advisor population rumbling toward retirement with too little focus on succession planning.

According to Cerulli Associates, there are 100,000 advisors controlling $10 trillion in client assets who are on track to retire over the next 10 years.

Of that group, Cerulli said about 45% are aiming for an internal ownership transition to an employee or family member. Another 30% are hoping for an external transition, which would involve selling the business.

That leaves 25% of the advisors heading toward retirement with no concrete succession plan.

It all adds up to a big question mark, according to a panel of succession planning experts speaking at Thursday’s virtual RIA Lab, hosted by InvestmentNews.

“What I see from a lot of firms is they’re relying on an individual to take over their business, but we know that stuff happens,” said Matt Matrisian, chief channel officer at AssetMark.

Because a good succession plan will take 10 years or more to prepare and execute, Matrisian said advisors need to prepare for all manner of scenarios if they want options beyond just selling to the highest bidder.

Not that there’s anything wrong with selling to the highest bidder, especially in a market where private equity is pouring money into wealth management and driving consolidation.

One major hurdle to traditional internal succession plans that involve grooming second- and third-generation advisors and partners to buy out the owners and founders is the shrinking number of young people coming into the industry, said Jeff Nash, co-founder and chief executive of Bridgemark Strategies.

“The training programs of yesteryear have been mostly eliminated,” Nash said. “The question now is who will pick up the ball for the next generations of advisors. It’s a multipronged challenge to the industry.”

Eric Godes, senior vice president at FP Transitions, said finding talent is currently the “greatest struggle” facing the wealth management industry.

“Most people start out wanting to do an internal succession, but you need to have multiple second generations and you need to have a plan,” he said. “And that also means you need to have a business growth plan, because those firms that have flatlined make it very difficult for next gen to afford the succession.”

Brooklyn Brock, founder of Ellevate Advisors, said succession planning, whether internal or external, can feel so overwhelming to some advisors that they will try to ignore it.

“A lot of those advisors see a lot of work to even doing an external sale,” she said. “A lot will jokingly say their plan is to never retire. They will just let their book get smaller, and their clients will pass away. But they should at least have a continuity plan.”

Nash said that while there two are distinct ways of looking at succession planning, the internal ownership transition and an external sale, there are also nuances that need to be considered.

“The external sale can partner with an internal succession,” he said. “We can also see partial and full internal transitions. In each scenario, if you have an internal succession they can become part of the external succession. Also, not all successions include an advisor winding down.”

Internal successions will inevitably require financing to help the second generation owner gradually take ownership.

On that note, Godes said it’s OK for the owner to finance the deal initially, but at some point there should be a plan in place for external financing.

Ultimately, Matrisian said, succession plans should be prepared well in advance of any planned ownership transition.

“You need a long runway to prepare for your succession,” he said. “Advisors can view a sale or gifting of equity as their transition plan, but what if something happens? What if they leave, get recruited away, and if you don’t have something in place where you can get control of that equity, you’re going to be in trouble. You have to be thoughtful about the plan you’re putting in place.”