Succession plan services gain traction as a tool for recruiting, making acquisitions

As the most senior ranks of financial advisers rumble toward retirement, the issue of succession planning is creating both challenges and opportunities for the larger financial services industry.

According to the latest research from Cerulli Associates, within the next 10 years, 37% of financial advisers who collectively control $10.4 trillion, or 40% of industry assets under advisement, are expected to retire.

Yet a quarter of those expected to retire within a decade remain unsure about their business succession plans, the research finds.

“It’s the same old story — advisers tell everybody how to plan for retirement and think about what’s next, but don’t do it themselves,” said Matt Belnap, associate director of retail distribution at Cerulli.

“Advisers are busy, and thinking about a succession plan takes time and effort,” he added.

The bull market for acquisitions in the advisory space has created an easy channel for advisers looking to cash out without building a complex succession plan. The Cerulli research, which was done in conjunction with Commonwealth Financial, explores the various options for partnering with larger firms.

“There’s a spectrum of independence,” Belnap said. “It will become more and more important for advisers to have a succession plan. And at those firms that advisers affiliate with, it will be a bigger part of their offering.”

Succession planning options can vary depending upon whether advisers are employees of a captive broker-dealer or independently affiliated, which often comes with a wider range of succession options, including the ability to build larger, multi-partner organizations that provide a path to equity ownership.

“Advisers have a diverse range of objectives that they pursue with their succession plans,” said Michael Rose, Cerulli’s associate director of wealth management. “Given the amount of assets controlled by this cohort, it is essential that advisers define those objectives and determine the best path to achieve them, far in advance of their transition."

The research shows that when it comes to evaluating a potential successor or acquirer, advisers place the most importance on the personality of the acquiring advisers, followed by the likelihood they will put the clients’ interests first and the firm’s regulatory/compliance record.

“It is essential that there is a strong alignment of core values, service delivery, and investment philosophy between firms,” Rose said.

Regardless of whether a business transition is done through a sale to a third party or internal succession, it's advisable to have strategic partners that can advise independent firms on the various elements of their succession plan.

“By going independent, advisers take control over how they build their practice, and many have built sizable firms with significant value,” said Kenton Shirk, vice president of practice management at Commonwealth.

“Successful independent firms now often think in terms of the legacy they will leave behind for their clients and community, and they’re adopting business models designed to endure even after they exit the firm,” Shirk said. “A strategic partner is critical to helping firms navigate options whether they’re thinking ahead about succession or driving growth through acquisitions.”