Succession Planning for Financial Advisors:
Step-by-Step Guide

When it comes to succession planning, there’s often a big gap between what we wish for and how it goes down. Most advisors get stuck in the wishing phase; they never even make it to the execution. Why not? Sometimes it’s due to a legitimate lack of knowledge – not knowing how to go about planning one’s succession – that holds people back.  Other times it’s emotional reasons, including the difficulty of letting go of something we have spent a good part of our lives building. There is no shortage of reasons why you may have deferred planning or may be actively procrastinating on this mission-critical initiative.

It’s too big, it’s too difficult.

A lot of why succession planning doesn’t happen is tied up in the simple answer that it’s really hard. We envision ourselves passing on our work to a successor, yet the path to handing the keys to the next person is full of obstacles. If you thought it was hard to build a successful practice, it’s a different kind of hard to successfully transition your financial practice. It is a really big project. It is really difficult. And it’s a tough path to walk alone. You’ll need help – lots of it. You may need to hire consultants, get your practice valued by professionals, answer never-ending questionnaires, and subject your practice to a due diligence process. At best, it’s a multi-year journey, and let’s just share the tough news upfront: this work is never done. There is no such thing as a succession “plan” per se – some tangible goal line, or final document that represents the accomplishment of planning. All you can hope for is to go through the exercise of planning over and over until you are at a point when the transition happens you have your ducks in a row, fingers crossed.

Unable to quantify the value of your firm?

Remember that everything that you think is a challenge is a challenge that has been overcome by someone in your shoes in the past. One of the things that advisors struggle with is how to value their firm. It’s important to know what it is that yields value in a firm. Engaging a professional valuation firm to assess your practice is a good exercise that can reveal areas you need to shore up in your business. Starting this initiative years ahead of time will provide you with a baseline value from which you can move up as you take steps to strengthen your business.

When you think you can’t trust your clients with another advisor

If you think you can’t trust another advisor with your clients, you’re in good company. Lots of advisors feel this way. One big emotional reason advisors don’t plan for succession is that they don’t trust that another advisor would take care of their clients as they would. This is avoidance of the inevitable at its best! Just because you think someone won’t be able to take care of your clients the way you shouldn’t mean that you leave them to be taken care of by no one. It’s like having children and not writing a will, leaving everything to be decided by the courts when you die, when you could have had a say in how they will be raised and by whom. 

It's true: no one will take care of your clients as you would. If you’re concerned about finding an exact replica of yourself, give up now. What you can do is find someone who cares similarly. “Similarly” is not “the same.” This is exactly why it’s important to get clear on your values and to engage in succession planning as soon as possible, so that you can control the things that are indeed within your control.

We purchased a practice several years back, an acquisition that we would call a success from just about every perspective. I say this with confidence because we have developed a strong, collaborative relationship with the owner and his staff, who fully integrated into our team for the agreed-upon duration, and because his clients are now happily integrated into our client base. We know without a doubt that it was the alignment of our values – first and foremost – that made this merger a success. The seller had been looking for a suitable buyer for his firm for seven (!!) years before we met. We asked him why he had not sold prior to that – it wasn’t due to a shortage of options. His response was that he hadn’t felt like he could entrust his clients to anyone who didn’t share his values, and that we were the first firm he really felt was up to the job. While it feels good to hear this as a buyer, it’s also a testament to the fact that fit is critical and that no matter how much you doubt whether your clients can be handled by another advisor, they can in fact thrive under the right circumstances with the right buyer.

Still have your head in the sand about starting a succession plan?

What would you tell a client of yours who is resisting thinking of the worst-case scenario? It’s hard to think about one’s own demise. It’s only slightly easier to talk about someone else’s. This is another reason why succession planning tends to end up on the back burner for most business owners. The topic is highly emotional, and as humans, we don’t like to think about death and disability.  And yet, that’s exactly what we need to do if we are serious about succession, or at least the critical component of continuity planning. 

Not enough time or too much time?

There is another reason why advisors don’t get their succession in order. One is the excuse of not having enough time. Yes, you’re busy tending to the business, and this is so big that it always ends up by the wayside. The opposite is also true for some advisors. If you’re feeling like you’re young, you’re healthy, you’re feeling invincible and optimistic and don’t think that you need to worry about such things quite yet, then you won’t feel the full urgency to set a plan in motion. Getting started ten or more years before you need to be ready isn’t out of the ordinary.  In fact, the sooner you get started, the better. Why not today?

Let’s take a step back and define succession. Succession is the process of strategic planning for replacing or passing on leadership of an organization. For financial advisors, who essentially are small business owners, the process of succession planning has personal, business, and financial impact, and comes with a unique set of tax considerations. Succession doesn’t have to mean the sale of a business. It could take the form of transitioning the business to a family member or arranging for a management-led buyout or grooming an internal successor. As we have already pointed out, in the United States, one outcome of the aging of the Baby Boomer population is that financial advisors who fall within that demographic are needing to plan their exit from the business. Unfortunately, it’s happening right at the time that most of their clients are planning for their own retirement. 

Succession planning is a process that bridges several strategic business planning objectives. On the one hand, it offers the opportunity (the necessity!) to provide for the continuity of the business in the event of the death or disability of a business owner or partner. At the very least, every financial advisor must have a continuity plan for the business. Imagine the unfortunate series of events that would unfold were you to meet an untimely death or find out that you have a terminal illness or some disability. Not only would your personal life potentially be upended, so would your clients’.

Another feature of the succession plan is good old-fashioned business planning. By this we mean making sure that your business is in good order. Do you have the right people in place? Are all your business processes and financials in good order? Do you have a sense of your purpose, your mission and vision? 

Finally, the succession plan is a plan for exit. An unplanned exit has potentially negative consequences. A planned exit, however, can be a beautiful event – for you, your staff, your clients, even the community at large. Exit planning includes things like strategically maximizing the value of the business, ensuring that clients stay on beyond the sale or transition, and deciding what kind of legacy you want to leave behind. After investing ourselves into a business, often for decades, there’s a sense of pride or accomplishment in wanting to leave something of value that outlives us. You get to decide that, if you engage in a planning process. You won’t if you don’t.

Now let’s look at the three building blocks of a succession plan and how you may benefit from going through the succession planning process.

Worst Case Scenario: A Plan For Continuity

The baseline plan for succession is the business continuity component. Consider it like the basement of the house, upon which you are building a succession plan. In the worst possible case, if you’re in a car accident, or some other terrible accident befalls you and you are unable to work the next day, what would happen to your business? A plan needs to be in place for this kind of scenario. 

My business partner, Ben Beck and I have such a buy-sell plan in place, developed by our attorney, and funded with life insurance. We have separate policies on each of our lives, and Beck Bode, the business, owns the policies. The idea behind this is that if one of us dies prematurely, the proceeds of the life insurance policy fund the purchase of the business by the surviving partner and allow for a payout to the deceased party’s estate. As terrible as it is to imagine either of us not being able to live out a long and full life, this legal arrangement helps our families from having to make tough financial decisions at a time that will be emotionally trying. 

Keep in mind, though, even this arrangement is not an adequate succession plan. All it is an emergency plan in the case of a catastrophe. Not only does it make common sense to have a continuity plan in place, it is also a requirement by the SEC for firms that exceed a certain amount of assets under management. This is something that would come up for you in a compliance audit if it hasn’t already. If you have any questions about this, make sure to educate yourself. One benefit to succession planning is that it results in a review of your business through a compliance filter.

You want to make sure that the assets under your care, or the families and businesses who rely on you for guidance are suitably cared for. In instances where the business is not substantial enough to trigger an SEC-required continuity plan, it may be possible for the assets under management to go back to the custodian. But is that what you really want for your clients? To be relegated back to the custodian as so-called ‘orphan accounts’? Hopefully not. 

Strength Workout: Your Business Plan In Action

If the continuity plan is akin to building the basement of your succession planning house, then the next level is establishing the structure and framework to support a solid load. The process of strategic planning for your business – yes, the sometimes unexciting year-over-year review of business fundamentals – is the business equivalent of going to the gym and getting in your reps through a strength workout. While you’re doing it it’s not what you’d necessarily call fun, but over time you’ll be seeing results, and boy, after a while, you’re looking good! 

Dig deep to discover your purpose

Many years ago, in the early development of our joint practice, Ben and I and our team engaged in a deep exercise of looking at our values and the purpose behind our firm. It was slightly uncomfortable initially to get so personal about what was our driving motivation behind starting our firm, but we dug in and the outcome of that exercise has been our North Star ever since. We have a strong understanding of who we are, why we are here, and what we are tasked to do. We also make sure that our team members are clear on the firm’s purpose and on their own purpose. Every new team member is exposed to this thought process. Our strong sense of our ‘Why?’ has become the map for our way forward. It allows us to connect with clients and prospects who share our mission. It also allows us to determine whether a firm we are seeking to acquire is a good fit or not. 

Recently, in conversations with a prospective firm, we shared our purpose in such detail that the seller was in a state of delight and appreciation that we had found each other. That single conversation was what allowed us to stand out over all the other people who were interested in purchasing the business. 

Beyond requiring you to look inside for your purpose, mission and vision, the act of business planning asks you to make sure you have hired the right people, trained and entrusted them with the critical processes that ensure the successful operation of your business, and that you have a repeatable formula for profit. Going through a multi-year strategic business planning process that is executed diligently can only have positive effects. It will enhance your firm’s performance and make you that much stronger for the succession dance ahead.

Do you have the right people on board?

Having the right people on board is an important step in preparing your succession plan. One of the things we hear repeatedly when we interview prospective firms that are looking to merge with ours is that the owners want to build a ‘deeper bench’ but have been challenged in accomplishing this objective. Hiring the right people isn’t easy, especially in a competitive field like ours. Once you’ve hired someone, they often need to be trained in your business and your culture, even if you’re lucky enough to find an experienced self-starter. And then comes the additional twist of making sure that your team members are happy and fulfilled, that the job you have designed continues to remain interesting and relevant to them and their talents. It’s not just about attracting the right talent to your firm, it’s also about rewarding and retaining that talent. For solo operator practices (which describes most advisor outfits in the United States), this is a daunting task. Do you need to be the lead advisor, the business owner, the marketer, the salesperson, and now also a trainer and manager and motivator of people? No wonder most financial advisors throw their hands in the air and decide they can’t put together a team. 

Those advisors who do succeed in building a team will enhance the value of their practice. Having a cross-trained team not only makes the firm more resistant to all kinds of stress, but also elevates the overall competency of the firm, challenges team members to stretch, engages and potentially retains them. Staffing changes are felt as less disruptive when other team members can jump in. One of the most positive outcomes of a team-based approach is client satisfaction and the fact that the next generation of leadership is being cultivated for the long-term benefit of all involved.

Tighten your business processes

Something that buyers will look at closely is whether your business processes are streamlined, documented, repeatable and scalable. Simply said, are things in the “business owner’s head” or could the business be run without the business owner. Clearly, you understand why this would be important. No one wants to pay top dollar for a business where every relationship and every bit of work resides in the head of the owner. If this sounds like your business, now is the time to invest in getting your practice firmly established in a CRM, capturing your key business processes and documenting, documenting and documenting some more.

Strengthen your financials

Another reason to start planning early is to get a handle on your business finances. By keeping careful tabs on various financial metrics of success, you can influence where your business is headed. It’s also important to engage the help of an experienced accountant to assist you in this process.

On Your Terms: A Plan For Exit

Whether you are looking for an internal successor preparing to sell to an external party, having an exit strategy can only benefit you by allowing you to sell on your terms, to the extent possible. 

Developing an exit strategy includes taking stock of the current value of your firm through a formal valuation, determining the characteristics of the ideal buyer for you, and give you time to strengthen your business infrastructure (people, processes, profitability). The stronger your exit plan, the more power you have to impact the value of your firm. 

Add your clients to your support team

There’s one more thing you gain by intentionally developing an exit plan, and it’s simply invaluable. It’s the support of your clients. Let’s not forget that for you to succeed in the sale, you must make sure that your clients stay on with the buyer, long after you have said your goodbyes. After all, your clients have a choice in the matter. If they don’t like the buyer, they can walk. No one wants that.

You can’t start telling your clients early enough about your plans for retirement. They need to know. They deserve to know. What you want is to make them your allies and cheerleaders in this process. In one firm that we acquired the clients were so aligned with the advisor in his efforts to sell the firm that he listed his clients as references we could call to ask about the state of his firm! When the merger was in discussions, he negotiated (and we required) that he agree to stay on for several years for the full client base to feel comfortable with our leadership (which he did, and they did.) The clients were so supportive of him; they wanted him to succeed in finding the right buyer because they knew that when he found that buyer they would be in good hands. It truly was a win-win-win, for us, for him, and for the clients. That is the best-case scenario.

Developing a succession plan is a process that’s analogous to financial planning for a client’s future, or for the sale of a client’s business. If you are familiar with those processes (which you probably will be if you are an advisor reading this piece), then you will recognize its key components: goal setting, quantifying desired outcomes, scenario testing various paths to completion, ongoing iteration, and finally, execution.

Start with your own dreams and goals. How do you envision your life after you are done with this chapter of your life? How will the succession of the financial practice you have built be a vehicle for what’s important in your life? For some people it’s the attainment of a financial goal, for others it’s leaving a legacy of some kind. It may be a combination of both. Know your priorities, know what you want your business to yield for you.

1. Develop a timeline and framework for the succession planning process

You’ll need to start well ahead of time given that the succession planning process entails multiple levels of planning: continuity, exit, and strategic business planning. 

The first order of business is to avoid calamity. This calls for the immediate development of a continuity plan. Once your emergency plan is addressed, the next step is to engage in an assessment of your business fundamentals, which means looking at people, processes and financials. The outcome of this assessment will dictate your priorities. Will roles and responsibilities need to be refined? What processes will need to be captured? What financial goals will need to be set and met?

2. Consider internal versus external succession pathways

If there are internal succession candidates you will want to take time to groom this person for taking over the reins of your business. You will need to develop a plan for growing this individual over time. 

3. Involve your team and your clients in the process

Even though we mentioned this before, it bears repeating. Tell your clients your plans, and share your plans with your staff, too, because they probably have even more contact with your clients than you do. You want your staff to be supportive of the process, so that they can have a reassuring effect on clients about the future viability of the firm. If clients feel like the team is confident, it will produce confidence in them, too.

4. As you close in on the timeframe engage professional help

Within a few years of the succession, you will want to put together a team of advisors to help you with your plan. By advisors, I mean an experienced attorney, accountant, valuation firm, practice management or business consultant if you need them, and any other outside subject matter expertise that can help prepare you for the transition. 

5. Deal time: Do your due diligence

A serious deal will require a due diligence process to be completed on your firm, but you will also want to perform your due diligence on the potential buyer. Again, with the assistance of the right professionals, you will establish the structure and terms of the deal. Once you feel like you have found the right fit at the right price and on the right terms for you, you’ll move to the execution phase.