Advisors Need a Plan For Succession

Succession financing is a hot topic on advisors’ minds—and it should be. Older advisors who want to retire need to find new talent to fill their shoes, and then train them. In addition, the finances of the business make it challenging to transfer ownership to the next generation of advisors.

And yet, advisors owe it to themselves and their clients to plan an orderly transition. The average age of an advisor today is approaching 60. Even so, according to a 2014 study by Aite, only 38% of advisors have any kind of plan to transition their business, and many of them do not know how they will execute it. The biggest stumbling block: financing. The study also found that most advisors do not know how to find it, or what it would take to qualify.

A changing regulatory environment may ask more of advisors in the near future, as the SEC has brought up the idea that an advisor may be required to have a succession plan in place in the future. The goal is to protect clients, who deserve continuous care and attention to their assets.

But from our point of view, it is the advisor who will benefit. Advisors spend their career building a valuable practice by serving clients carefully and well. What if they considered themselves as a client? Then, they might suggest: Do the research and partake in the value your business has built. Make the liquidity event happen. You don’t even have to retire—you can continue to work as a consultant, but you will have access to the capital you created and can fund your own future.

Succession vs. Contingency

At the very least, regulations require that reps have a fallback for their clients if they are hit by the proverbial bus, or some other accident or illness befalls them. Typically, this is a matter for the home office, and clients can be effectively transitioned to a new advisor while the practice is sold. But there’s a better way: A buy-sell agreement with a like-minded colleague and a price negotiated in advance. This provides a better client experience and, most likely, a better outcome for the former advisor and his or her family.

Succession, however, is more advantageous—and more complex. For the home office, there are two important goals: First, to support your advisors and second, to keep assets on the platform.

Forward-thinking broker-dealers have created internal programs to help advisors sell their practices to an internal or external buyer within the network. Even these transactions, though, require capital, and broker-dealers may want to “keep their powder dry” so they can use it to bring in new advisors. So home offices as well as individual advisors are well served by developing relationships with financing partners who can make capital available to their reps and who understand the dynamics of acquiring a financial advisor’s practice.

For example: At my firm, Live Oak Bank, we evaluate practices based on discounted future cash flow. That means we have to take a deep dive into a practice and its client list. Are they all retirees, to take the simplest example? That’s less valuable than a more diversified group. Is the technology up to date? Future clients are most likely to expect more services delivered online, more often. A savvy borrower will add in funds to bring the practice’s communications platform up to the home office’s best-practices level.