Jump-start succession planning by broadening advisers' perspectives

The goal behind everything we do at the Financial Services Institute is strengthening and protecting the independent-financial-services industry. Most of the time, that means communicating with legislators and regulators, but often it means facilitating conversations among our members on critical topics. One subject we have worked to call attention to over the past several years is the much-discussed shortfall in succession planning for independent financial advisers. According to our polling, only 41% of our adviser members have a succession plan in place. Some other sources have estimated that the number may be as low as 20% for all advisers nationwide. In order for our industry to maintain the momentum it has built over the past few decades, we must work together to ensure advisers have the resources and information they need to develop and execute strong succession plans. This is not only a crucial priority for today's advisers and firms, but for their clients and the next generation of advisers, as well. Just as every advisory practice is unique, each adviser's succession planning goals and concerns vary. As we discussed during the Succession Planning Track at our recent Financial Advisor Summit, there is no one answer to the fundamental questions that will help an adviser determine the right transition path for his or her business, such as: • How can I determine whether to sell to an internal buyer or to another established adviser or consolidator? • If I want to transition the firm to a junior adviser or group of advisers on my team, how can I tell whether they have the skills and personal qualities to take the reins successfully? • If I decide to sell to an outside buyer, what do I need to know about the current mergers-and- acquisitions market? • How do I value my business and structure the transition or sale? As is so often the case in our industry, I believe that the solution to the challenge of succession planning lies partly in facilitating dialogue among advisers themselves. Even with the superb level of support in this area offered by many independent-financial-services firms, advisers are finding that the answers to the questions above — among many others — require input and perspective from a broad range of expert sources, including from advisers who have been through the process themselves as either buyer or seller, or are currently engaged in a transition. By connecting with their peers to frame the key issues to concentrate on, advisers can avoid basing their succession planning efforts on anecdotal data, or on “rules of thumb” that may not apply to them — such as the widespread assumption that an advisory practice should be valued at two times annual revenue. It also can help them gain a sense of urgency about the process: as one panelist at our Financial Advisor Summit pointed out, the Small Business Administration estimates that 70% of all privately held businesses fail in the first generational transition — and ours is largely a first-generation industry. In addition, establishing stronger dialogue between advisers on the topic of succession planning can alert these professionals to crucial pitfalls they may miss if they develop their plans in a vacuum. As another panelist at our summit mentioned during a discussion on the mergers-and-acquisitions market for advisory practices, it can be tempting for an adviser to agree to sell his or her business if the financial terms of the deal are attractive enough on the surface, but advisers should never underestimate the importance of cultural fit in determining the long-term success of a sale, especially when an earnout is involved. Understanding how to assess that cultural element and how much time to devote to due diligence are questions that advisers can best resolve by incorporating robust conversations with their peers into their preparation for transition planning. Clearly, in an industry of fiercely independent and very busy financial advisers, there is no silver bullet that will resolve the succession-planning challenge all at once. By establishing effective dialogue between independent advisers who are approaching succession planning for the first time and those who have been through the process themselves in various capacities, however, we can help alleviate some of the uncertainty advisers feel regarding this crucial issue and give them a broader pool of experience to draw from. When advisers feel more confident in their ability to craft a succession plan that accounts for the nuances of their individual situation in a comprehensive and strategic way, adviser engagement on this crucial challenge will only increase — and our industry and hard-working American investors will be better for it. Dale Brown is president and chief executive of the Financial Services Institute.