Five mistakes when passing the baton

Working with advisers over the years, I’ve seen firsthand how creating and executing a solid succession plan can be fraught with pitfalls. While they can spend as much time on succession planning as larger companies, advisory firms must take into account concentrated risks that large companies rarely encounter.

Still, careful planning can spell the difference between selling a list of clients and selling a healthy, viable business. (There’s no need to say which has more value.)

When they begin to plan, advisers often stumble in similar ways. Let me give you five of the most common mistakes advisers make in succession planning.

Substituting personality for thoughtful business branding. It’s easy for a business that helps people manage their financial lives to become synonymous with the person who is largely responsible for delivering that service. In fact, the stronger and more vivid the personality of the adviser, the more tightly clients bond with that person.

However, an advisory business isn’t ready to to be sold until the principal adviser has moved beyond personal relationships and built a practice that is process-driven and branded. Whether you manage assets yourself on a continuing basis or are the face of client service or business development, it is very difficult to transition your business when your brand is inseparable from you as an individual.

Not having a long-term vision. Advisers who are immersed in the day-to-day routine of the business often don’t take the time to step back and think about the future. It takes five to 10 years to put a plan into place and to cultivate in-house talent. Junior partners need time to gain experience and solidify client relationships. An effective transition plan is not just documentation of training steps; it begins with developing a vision of what you want your practice to look like and how you want the transition to take place.

Wanting to maintain control. It may be stating the obvious, but an unwillingness or inability to cede control can sabotage attempts to develop a succession plan. If your practice has been your life’s work, and you have spent decades building your business and cultivating one-on-one client relationships, there’s no doubt that relinquishing control to a junior person can be an emotional hurdle. But for any internal succession plan to work, an adviser must be willing to let go. Engaging in honest self-assessment at the outset can lay the foundation for you and your successor to collaborate in pursuit of mutually beneficial goals.

Not having a contingency plan. Many advisers overlook the importance of having a thorough contingency plan to address worst-case scenarios. What if you suddenly are unable to serve your clients? What if you invest time transitioning ownership, and the succession plan falls through? Handing off your business to a single individual perpetuates the problem of concentrated risk. One way to mitigate the risk is to get more than one person to buy into the business. You should have an attorney help you review your plan and set up covenants and agreements to cover a range of scenarios. For example, think through what might happen if after your transition, a number of clients leave or revenue significantly declines. Another possibility: things don’t work out between you and your successor, and you need a mutually acceptable way to unwind your partnership.

Not having a realistic idea of the firm’s value. Sellers tend to overvalue their businesses, but having unrealistic assumptions about valuation can result in a failure to shore up a business’ weak spots. Since valuation is a measure of cash flow, growth and the risks underlying your practice, an accurate assessment of value can lead to work that will improve those metrics. Early in the succession-planning process, seek an accurate, detailed third-party valuation so that you understand what your business is worth.

Finally, many advisers see succession planning as an end to their life’s work. However, if you construct a robust plan that successfully avoids the major pitfalls of succession, the post-succession years can be extremely rewarding. It can be a time to create a business legacy.

While the details of each succession plan will vary, an unhurried and well-considered plan will improve continuity, smooth the transition for you and your clients, and enhance the business you have built.

Matt Matrisian is director of practice management at Genworth Financial Wealth Management Inc.

For archived columns, go to InvestmentNews.com/successionplanning.