If you can count yourself among the minority of advisers — about 40% — who are within five years of retirement age and have created a succession plan, you're all good, right? Maybe.
In working with advisers over the years, I've found that potential monkey wrenches abound in even the most solid succession plans. Advisers who do everything right often end up with disappointing results, forcing them to alter their retirement timeline or compelling them to cobble together a vastly inferior Plan B on short notice. It is important that you know the most common reasons succession plans fail so that you can attempt to avoid them. It is also important that you consider creating a Plan B.
WHY SUCCESSION PLANS FAIL
The most common reason plans fail is due to a lack of financing options available for the retiring adviser. As we all know, outside financing can often be extremely expensive or completely unavailable. If you are providing seller financing or if your revenue and/or growth rate fall short of assumptions, the entire deal could unravel.
In addition, business valuation errors can bring down the sturdiest succession plan. If an incorrect valuation model is used, the process is disrupted and the outcome becomes biased toward one of the parties. This, coupled with unrealistic expectations (also common) can have a disastrous impact. Issues over the ultimate control of the business and the division of responsibilities during an internal succession can lead to conflict and legal tussles when the business changes hands.
In addition to subpar financing options and valuation errors, a simple lack of time can drag your plan down. Identifying, training and developing a successor (or successors) typically takes longer than most advisers think — not to mention the time it takes to transition client relationships. Your timeline can also be altered by a sudden change in health. Unless specifically addressed within a succession plan or a standalone contingent succession plan, a sudden illness, disability, or death can lead to confusion and disarray at the worst possible time.
(More: See Investment's special cover story, "When Time Runs Out")
PLANNING A PLAN B
In creating a contingent succession plan, you can protect your business and your clients from experiencing a failed business succession.
Let's face it, everyone likes planned, rational outcomes. The good news is that getting all this to work out in a planned, rational way isn't all that complicated. The answer, in three words: contingent succession plans. These plans are exactly what they sound like. They are simply back-up succession or continuity plans that go into effect if the original plan fails. In fact, I find it surprising that so few of us take advantage of these critical safety nets, particularly in the light of what's at stake should the unexpected happen.
Contingent succession plans are not something that comes off of a shelf. To create an effective plan you need to identify another adviser or firm who is interested in being your contingency partner. Larger registered investment advisers typically play the contingency partner role for smaller firms. As with any other part of your practice, a little due diligence goes a long way. Some firms offering contingent succession plans are mass-acquisition firms and focus most of their attention on the valuation of the agreement. Other firms are focused on getting the best fit — service quality, culture, investment philosophy — for you and your clients. These firms may not participate in as many contingent succession plans but the ones that do are more likely to fit well.
The message is that there are options as you look to create a contingent succession plan and finding the right partner for you should not be hard.
Our industry has benefited from the contributions of the many baby boomers who have built their careers around this business. Now we're all facing a changing of the guard. You have no doubt poured blood, sweat and tears into building your advisory practice. If you plan to take the succession route, there is absolutely no reason why you — along with your clients and family — should become victims of a failed one.
JC Abusaid is president and chief operating officer of Halbert Hargrove, a fiduciary investment management and wealth advisory firm.
