June 29, 2020 – Imagine this: You sit down with a prospective client in his late 50s who wants to retire in the next 10 to 15 years. He casually mentions that he has no retirement plan in place. “Never even thought about it,” he says. If you are like most financial professionals, you would probably struggle to keep the shock off your face. And then you would roll up your sleeves and get to work.

Yet many financial professionals are in a similar situation in that they do not have a clear succession plan for their firm. According to one recent survey, only about a third of registered investment advisors have a clear transition plan in place.¹

This approach would be troubling under any circumstance, but many financial professionals are in an older demographic. The average financial professional is in his or her mid-50s, and a large component are in their 60s and 70s—which means that thousands of practices and millions of clients will likely transfer to new owners in the next decade.² One study found that 37% of financial professionals plan to retire in the next decade, with about $2.4 trillion in assets potentially in transition.³ Seeing these numbers is like finding out that a thoracic surgeon is a pack-a-day smoker, or that a lawyer has no will.

Three Priorities to Think About

There’s no doubt that succession planning can be daunting process. To simplify it a bit, break it into three main aspects.

Decide Between a Sale Vs. a Succession Plan.

The main challenge for many financial professionals is that they conflate a sale of the firm with succession planning. A sale can be a relatively straightforward transaction, if a buyer and seller can agree on a valuation, but succession planning is far more nuanced. That’s the route that many financial professionals want to take, because the firm can continue generating cash flow for them, they can continue to work if they want, and the firm they built up will live on.¹ But succession planning can take years, so it requires a lot of foresight to begin that process long before a founder or owner wants to step down.

Identify—and Develop—The Right People to Take Over.

Next, financial professionals need to think in terms of handing over control of the business. It is critical to identify the right candidate and make sure that person shares the same values and leadership style, including the ability to resolve conflicts. That person will also require significant mentoring to ensure a smooth transition—particularly if he or she is younger and has less experience in the industry.⁴

Communicate With Your Clients.

Finally, financial professionals need to ensure that their clients are part of the succession process. Once you have a clear plan for transitioning the business, you need to start thinking in terms of your client relationships. Your clients need to know about your successors, and they need to be comfortable with the handoff.² Otherwise, you risk losing them to the competition.

There is a saying that financial professionals often use with their clients about the need for proactive thinking for the future: Failing to plan is planning to fail. For the many financial professionals who have not put a succession plan in place, that’s good advice.