Fears of client defections, firm undervaluation keep advisers from planning their exits.
Advisers underestimate the importance of succession planning and don't spend enough time devising and implementing plans, according to panelists on yesterday's InvestmentNews webcast. And it shows — less than one-quarter of advisers have prepared their business for their own departure.
Participants on the webcast panel included succession planning experts Brad Bueermann, chief executive officer of FP Transitions LLC, and Garrett Taylor, president of Advisor Successions LLC, who emphasized the point that a plan should fit not only the adviser's own personal needs but the needs of their support team and, of course, their clients.
“On the transition front, the thing that keeps everyone awake at night is whether the clients stay,” Mr. Bueermann said. “If you write a large check and then the clients scatter to the wind, you'll have bought a bag full of feathers.”
One suggestion by Mr. Taylor is to consider a succession plan that allows team members to take over the business from their boss. However, that requires an alignment of interests.
“It's about getting the compensation right, using all the components available to you, including performance compensation, salaries and profit sharing,” he said. “At that point, you will encourage the members of your team to contemplate buying in.”
According to Mr. Bueermann, one reason advisers are reluctant to create a full-fledged succession plan is that it forces them to confront the value of their book, which is often less than expected.
“Common roadblocks are that advisers have an inflated value of what their business is actually worth,” he said. “It's very difficult for someone looking to sell their business after being in it for 30, 40, 50 years — and blood, sweat and tears.”
The financial adviser on the panel, John Enright, principal of Custom Wealth Management, sees his industry as woefully underprepared for inevitable transfers of power. But he understands why advisers are reluctant to entertain the idea of succession.
“How are these valuations done?” he asked. “I just get frustrated getting [my business] plugged into a box. A lot of us believe our practice is worth much more than we're told it is.”
