Facing the succession planning crisis

Succession planning receives lots of attention in the advisory world — and with good reason. While the precise statistics vary depending on the source, all studies point to the fact that less than 25% of advisers have viable succession plans in place. Looking at the demographics of our industry drives this point home further. According to Cerulli Associates Inc., across all channels, including RIAs and wirehouses, advisers who are at least 60 control more than $2.3 trillion in client assets. For advisers like these, there has never been an industrywide solution to help protect their clients, their employees and their families for the long term. This is why I say we are facing a succession crisis in our industry. All too often, advisers tend to think about succession as passing ownership from one generation of owners to the next. Given the tremendous value that many advisers have built in their practices — and the historically poor options for passing ownership in an economically viable manner — this is clearly important. But it is not enough. In my mind, any good succession plan needs to begin and end with the end client in mind. So instead, I move away from the idea of succession planning as simply changing ownership, and think of it as real continuity planning. After all, we are really in business to serve and protect our clients and their families, whenever they need us. Doesn't upholding your fiduciary duty to your clients require you to have a viable succession plan? I certainly think so. In fact, the SEC recently noted: "An adviser's fiduciary obligation to its clients includes the obligation to take steps to protect the clients' interests from being placed at risk as a result of the adviser's inability to provide advisory services after ... the death of the owner or key personnel." This doesn't mean we don't have a responsibility to our families and employees — we do, and continuity planning includes the steps to ensure they are also protected from anticipated and unanticipated events. Doing so requires a solution for you to realize value from the practice you have built over the years, sometimes over a period of multiple decades. But unfortunately, as with all worthwhile things, finding the right solution is often easier said than done. Generally speaking, two options exist: You can either build a plan internally or partner with another firm to provide the solution for you. Within the RIA industry, Option One can be a challenge since 70% of advisory businesses are sole proprietorships. Putting together and funding the necessary resources and infrastructure internally to develop a robust solution may not come easy, and this will lead many advisers to consider the second option. But we also see many examples of where Option Two has its challenges. In ad hoc succession relationships, advisers often fail to ask themselves or get inadequate answers about whether their new successor firm (a) is a good fit with their firm (similar client profile, service model, investment philosophy and culture) and (b) has the advisory capacity to absorb clients. Oftentimes, finding the right partner takes time and consideration of a variety of firms with the capabilities to successfully transition your business. So my best advice? It is never too early to plan for the future. Take the time to ask yourself how and who can help you answer these important questions to ensure your plan will really work when the time comes. And once you can answer yes to the questions above, then your clients — and you and your family — will be able to sleep better at night. MIchael Paley is managing director of business development and relationship management at Focus Financial Partners