About two years ago, I wrote about an adviser who died without a succession plan, wreaking havoc on his clients, his business and his family.
About two years ago, I wrote about an adviser who died without a succession plan, wreaking havoc on his clients, his business and his family.
Rob, who provided my parents with solid financial planning for more than 20 years, died of cancer at 67. While a great planner for others, he never implemented a succession plan for his family's business, which he ran with his son, John. (I've changed their names for the sake of privacy.)
Their experience is not unique, which is a tragedy for family-run advisory firms and the thousands of clients — like my parents — whose advisers do them a serious disservice by neglecting to plan for the future of their business.
A recent study by TD Ameritrade Institutional revealed that 57% of 500 registered investment advisers surveyed had no formal succession plan in place. What's more, 88% had no business valuation plan in place, which means many owners have not figured out how to extract sufficient value from the business to pay for their own retirement.
This is a real problem because the vast majority of advisory firms are run by sole practitioners.
While no one likes to dwell on their own mortality, advisers have a responsibility to their clients to recognize that they will not be running their businesses forever.
“While some advisers may not be ready to sell or exit the business, anticipating the unexpected and putting a plan in place for the future can help put employees and clients at ease while positioning for the long-term viability of the business,” Mike Watson, TD Ameritrade Institutional's director of practice management, said in regard to the study's findings.
Not planning ahead and not anticipating the unexpected was a big mistake, John admitted to me.
When John joined the firm a few years before his father's death, my mother was hardly aware of it. Rob continued to handle the older, longtime clients, who had come to trust him and his style, and apparently Rob and John decided that that arrangement would work just fine.
Advisers with whom I spoke said it would have been better for Rob to instruct John to work with those clients as soon as it was decided that John was going to succeed him. Rob should have asked his son to help co-manage the client relationships until his planned retirement.
Rob's untimely death, however, caused a shock among many clients, including my mom, because they were not acquainted with John and therefore had no comfort or trust level with him. Many went elsewhere.
“In any family-run business, there has to be trust with the older generation that is in control as well as with the younger members who eventually want to take over,” John said. “I learned the hard way that communication is critical.”
Rob most likely believed that there always would be time for a transition plan. That proved to be a very bad business decision.
Control is the stumbling block. Many advisory firm owners are just not ready to give it up, or they lack confidence in any senior manager to take charge. What a costly mistake.
Rob, like many of you, sacrificed a great deal to build a successful business. I'm sure he envisioned that everything he worked so hard to build would be turned over to his son.
That's what happened, of course, but not in the way Rob envisioned it.
With no plan in place, it became not only a big administrative headache but also a much less viable business than Rob had built.
Is that what you want?
Sure, succession planning isn't easy. But remember Rob and John the next time you decide to put it off.
Jim Pavia is the editor of -InvestmentNews.
