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So much of the work we do is helping clients achieve their ultimate goal: a comfortable retirement. But what’s surprising is how many advisors have not started planning their own retirement and succession.
Mistakes are easy to make but are easier to avoid if you know what a “bad” succession plan looks like.
1. Choosing the wrong person
The most common mistake advisors make in terms of their succession plan is having no plan at all. But the most impactful mistake is shopping for a buyer without developing a solid plan – essentially working backwards. In short, a successor should be chosen to fit the plan, instead of molding the plan to fit the successor.
Similarly, advisors need to determine what they want for their clients in the long term, and then investigate options to determine who might be the best fit. Don’t settle on someone you think will be successful simply because of the performance you see them experiencing. Instead, start with a relationship-based search to find the candidate that would best acclimate to the business, and ultimately, your client relationships.
2. Relying on a single successor
Another aspect of succession planning often overlooked is the inherent risk of relying on one successor. Look for an advisor team rather than a single advisor, since teams tend to be much more flexible than an individual, and often have a broader spectrum of expertise among them. There is also less risk involved in working with a team as opposed to an individual advisor. Think about it – what if something happens to the individual successor you’ve decided on, whether through unexpected tragedy or their choice of a different path?
One of the most effective ways to vet a potential successor team is to join an independent RIA network where you can gain access to a wide range of financial professionals. By reviewing their services and acquainting yourself with their processes, you will gain valuable insight into whether they would be a good fit for your practice and clients.
3. Doing it all yourself
Even the best, most capable advisors sometimes need help. Advisors who fail to have third-party assistance when laying out the transition should anticipate their plans will fail, or at the very least, be more complex and frustrating to implement. Imagine if one of your clients decided to create their entire financial plan on their own, without any professional advice from an advisor, estate attorney, CPA, etc. They may be able to piece together some semblance of a plan, but it certainly wouldn’t be effective, comprehensive, or cohesive.
Three critical succession planning areas advisors should seek outside expertise for include:
Having a neutral intermediary to review the transaction details will prevent complications during the transition, and ensure that any back-end legal considerations are properly handled. Also, should some unfortunate scenario arise where the deal ultimately does not work out, you want to make sure that you, your business, and your clients are protected legally.
Many advisors who own their practices may be unaware of the full scope of the value of their businesses, so an annual valuation is a great strategy to incorporate into a succession plan. Not only does this help establish a baseline value to showcase year-over-year growth, but it highlights any growth-hindering factors that need to be addressed.
Tax evasion is illegal but implementing tax mitigation strategies is not. A CPA or tax attorney can easily help craft a tax-minimization and deferral structure for the business as part of the succession plan.
Even if you have already put together your own succession plan, it’s incredibly valuable to have people from each of these areas of expertise review and provide guidance so that plans can be updated as needed.
4. Forgetting it’s all about the client
Most clients will stick with their advisor if they move to another firm, but can the same be said for sticking with the same firm once their advisor retires? The answer is maybe.
The surest way to ease client concerns is to help them become familiar with the new team early in the process, so when they eventually take over as successor, clients are already familiar with them and more likely to trust them. Clients should be made aware that a diverse and well-rounded team can provide them with more resources and expertise, and personalities, to best support each individual client. Clients will feel much more at ease knowing there is a full team available to them after you have retired.
5. Not having a plan B
Another best practice is to build in a contingency plan to reduce the risk of unexpected events derailing your succession plans. Of course, navigating shifting situations can often prove challenging, but ensuring you have a fully funded retirement, disability, and long-term care insurance plan while you are still earning income can help you avoid depleting savings should something happen to you.
What if you are in a situation and realize that the candidate or team you have chosen is not a good fit after all? Like any relationship, the first step is to have a conversation, since most problems can be solved by talking them through. But if there continues to be issues or concerns, speak with an attorney to see what your options are in terms of renegotiating or buying out contracts.
Helping clients plan for their retirement should not detract from your own. It’s never too soon to think about a succession plan, so ideally all advisors should already have one in place. But if you don’t (and even if you do), planning to avoid or prepare for the above pitfalls will ensure your practice – and more importantly, your clients – are well taken care of after you’ve left.
After working for an industry broker-dealer, Alex Reffett broke away and co-founded East Paces Group to provide more customized money management solutions to his clients. As a visionary, he spearheads the company’s growth strategy, forging strategic partnerships and leading advisor recruiting and acquisition efforts.
Read more articles by Alex Reffett
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
