In conducting the research for our recent white paper, my partners and I were surprised to discover just how few owners of wealth management firms have done any meaningful succession planning for their businesses.
In our view, the behavior is bizarre. On one hand, owners fully recognize the critical need to develop a plan; on the other, the preferred solution is to ignore the problem.
The industry's demographics make this observation particularly surprising.
What was just 20 years ago a fledgling industry made up of young, ambitious entrepreneurs is now a big business dominated by geezers. Our data suggest that more than 60% of the industry's participants are over 50, and the average age of an owner is rapidly approaching 60.
Additionally, financial advisers will find no shortage of information available about the topic.
Nearly every conference holds a session on succession planning, numerous industry consultants and observers have written white papers about the topic, and every custodian has created a succession-planning program for its clients. Advisers also are reminded regularly by consultants and others of research illustrating how advisory firms having a succession plan are invariably more profitable and fetch higher prices.
Furthermore, advisers will find a full menu of approaches to planning for succession — some of which don't even require a sale. For example, a recent excellent white paper by financial advisory commentator Bob Veres suggests that smaller firms, which perhaps are unable to implement a succession plan on a stand-alone basis, merge to form a wealth management commune, of sorts.
When one participant retires, the others take responsibility for continuing to serve the retiree's clients. (For owners who are children of the 1960s, this communal approach to succession planning is an interesting alternative to consider.)
So what explains the limited appetite for addressing succession planning? We found three reasons.
First, succession planning is a highly personal experience that extracts a material emotional cost. In a sense, succession marks the end of an important phase of an owner's life; it is depressing in the same way as estate planning.
Many owners view their businesses as an extension of themselves. For some, the thought of selling or handing the business over to someone else is the psychological equivalent of volunteering for castration.
Second, only a handful of wealth management firms have consciously adopted a business model designed to allow the business to survive the departure of its founders.
Most firms were started with the singular purpose of helping clients. In those cases, founder compensation frequently was an afterthought. Thus, implementing a succession plan would require significant changes to the firm.
Finally, the cost/benefit reward for implementing a succession plan appears to be unappealing. More specifically, successfully transitioning a business between generations is, at best, time-consuming, complicated and messy.
Although the owners may capture some consideration as a result of the process, many founders have concluded that the benefits received aren't worth the trouble involved.
Consequently, most owners instead take the path of least resistance. They run the businesses indefinitely, milk it for as much profit as possible and then shut the doors at retirement.
If some other option comes along that offers a big payday with little accompanying annoyance, they may consider it. But until then, owners stick with avoidance and denial.
We have a term to describe this approach: narcissism. We use this harsh word because it perfectly describes the mindset of an owner placing his or her own interests ahead of those of the firm's clients.
Clients have a need for advice that survives the retirement date of their adviser. Failing to plan for succession leaves clients high and dry.
Finally, I find some irony in the behavior. Many wealth managers started their own firms because they were frustrated by their experiences as retail stockbrokers — a model that put the clients' best interests secondary to the personal financial gain of brokers.
However, to an outside observer, it is hard to see how advisers who are indifferent to succession planning are acting much differently.
Mark Hurley is president and chief executive of Fiduciary Network LLC, which invests in fee-only wealth management businesses as part of ownership transfer financings.
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