The truth about succession planning

For several years, research data have highlighted succession as a potential trouble spot for an aging advisory business. But retirement is not the industry’s only problematic succession issue, and maybe not even the most important one. Our inaugural study on the topic — The 2012 IN Adviser Solutions Study on Succession Planning — highlights two critical insights that largely have been missing from the discussion, until now:

• Succession planning is about creating a framework for the sustainability of the business and the transfer of ownership, not simply planning for some kind of terminal event such as a retirement or exit from the business.

• Successful firms excel at a wide range of practices that build transferable business value — that is, they are especially good at the “planning” part of succession planning.

Study results suggest that advisers and industry analysts who view succession planning exclusively through the lens of retirement or exit are taking too narrow an approach.

The idea that succession planning is part of a broad range of strategic activities fits with previous study data about what drives success. In several different studies, we identified a “top performer” group and correlated their success to high performance across a wide range of practices. That is, successful firms tend to excel at a cluster of best practices — while firms that lag the competition score lower across the same range of factors. We saw this pattern in our 2011 RIA Technology Study, our 2010 Financial Performance Study of Adviser Firms, and our 2011 Moss Adams InvestmentNews Adviser Compensation & Staffing Study.

Just as in previous reports, the 2012 Study on Succession Planning reveals that successful firms report higher relative performance across a range of planning measures. What was interesting was that those measures were not exclusive to succession. They included many strategic business and human-capital-development activities, including documenting a strategic plan, communicating that plan to employees, documenting job descriptions and creating career paths for employees.

In a recent interview with an adviser whose firm has been expanding its ownership for two decades; he put it this way: “Succession planning — just the very term — suggests that it’s about you, and about you individually. The fact is, the whole exercise should be about doing what’s best for your clients and your business and protecting all of the constituencies: your clients, your employees, your owners, everybody.”

In other words: “succession planning” is not about you.

In reality, the ultimate “succession” goal is to create transferable value, so you can monetize the business you have built. The transferability of value, in turn, depends on the strength of the firm’s operational processes, the skills and capabilities of staff members and their ability to achieve the firm’s strategic mission—independently from the founder(s) or current owner(s). You must demonstrate not only that your business is productive, profitable and growing, but also that it can continue to function successfully after you depart.

For the same reasons, it should be no surprise that continuity and legacy are top priorities for sellers: Firms that have executed an ownership transition plan report that their most important success factor is “continuing the legacy and reputation of the firm.” In addition, advisers who are selling ownership report that they want to stay in the business long enough to ensure the firm’s continued success. “Exiting over time” is much more important for firms that have already completed an ownership transition, compared to firms that are just in the planning phase.

So, advisers thinking about succession would do well to heed the data. Of those firms that have executed a transition plan, 81% report having a documented strategic plan, compared to just 45% of firms whose succession plan “needs refinement” and a mere 15% of firms that have no succession plan.

Well-prepared firms embrace the “planning” aspect of succession planning — in human-capital development, as well as operational sustainability (e.g., productivity, efficiency, profitability and growth). These firms interpret their succession mandate very broadly. For them, the goal is institutionalizing a wide range of business practices to create sellable value. It is rarely, if ever, seen just as transaction planning for a single, terminal event.

This May issue of the Adviser’s Consultant is focused on new information on the topic of succession planning. We will continue to dig deeper into the many aspects and nuances of the planning process and options for transiting ownership over the coming months. This is a critical issue that we at IN Adviser Solutions believe needs new perspective and solutions. We encourage you to use the comment features below to submit questions or share your own experiences with succession planning.

Kelli Cruz is the director of research and consulting for IN Adviser Solutions.

Related Topics: IN Research, The Adviser's Consultant