How Advisors Should Build a Succession Plan

Many financial advisors do not have a legitimate succession plan created for their company, even though they often recommend their business clients set one up.

The irony is not lost on the profession, but it’s common knowledge that financial advisors often lack a concrete, documented plan.

Advisors are woefully unprepared for various succession scenarios, including death, disability or retirement, says Matt Regan, president of Wealthcare Capital Management in West Chester, Pennsylvania. Only 27% of advisors in one study say they have any plan in place for that eventuality, according to a 2018 Financial Planning Association report. The FPA found that only 11% of advisors have clear retirement plans in place for themselves.

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While many advisors meet the succession guidelines of the Securities and Exchange Commission and the Financial Industry Regulatory Authority, the governing body of the financial planning industry, in reality many of them do not have a solid succession plan if a natural disaster or death occurred, says Daren Blonski, managing principal of Sonoma Wealth Advisors in California.

Having a continuity or succession plan is critical to ensuring an advisor’s clients are well served, he says.

While most advisors have some sort of a plan, it is not sufficient and detailed enough where someone could step in his or her shoes in case of a true emergency, Blonski says.

Instead, the majority of advisors need to create a detailed succession plan and find someone who can not only take over their business but also knows its operations, who the important clients are and various details about the clients, he says.

“That’s few and far between,” Blonski says. “There are many one-off advisors still operating without backup plans in place.”

[READ: What to Know About Working as a Freelance Financial Planner.]

How to Create a Succession Plan

A succession plan requires an advisor to identify someone in his or her workforce who is capable and willing to take over the practice, says Alex Chalekian, CEO of Lake Avenue Financial in Pasadena, California.

“Start having the discussion because you may find that a lot of advisors in your company may not enjoy managing a business or taking it over or, more importantly, may not have the financial capabilities to buy one,” he says.

Another option is to examine your current network of advisors and decide who you would feel confident about taking over your practice.

“It’s important to identify someone — think of it like having a life insurance policy,” Chalekian says.

Ensure that your company has detailed documentation on all its clients. When Chalekian acquired a practice in 2008 in the aftermath of the Great Recession, the owner was injured in a bus accident and later died. Not only was the business a “one-man show,” but the advisor never took any notes.

“There was nothing in writing — all of it was in his head,” he says. “We met clients who were freaking out and we had to put all the pieces of the puzzle together.”

When advisors do not have a formal succession plan, the value of their practice drops massively.

“This was more of an estate sale, and we bought the firm at one-third of the cost, which hurt his family members,” Chalekian says. “The practice is often one of the largest assets for an advisor,” he adds.

Advisors who do not have a partner who wants to take over their practice could enter into a buy-sell agreement with other advisors through companies such as FP Transitions that specialize in these transactions and will connect you with a potential partner, he says.

Accurate documentation of conversations you have with clients is critical, Blonski says.

If the information is not in your customer relationship management system, or CRM, it did not happen, he says. “You need to document any dialogue — it’s for everyone’s protection and especially for your succession plan.”

Here is a short checklist for advisors to follow:

— Create a process and workflows that you can repeat. It helps get the successor up and running to support the clientele, Blonski says.

— Ensure you have an adequate CRM that has all your notes and investment strategies. This step helps another advisor take over the relationship with the client, he says.

— Allow for a transition period. It can take at least a year for a successor to get comfortable and to make sure there is continuity in the service, Blonski says.

Having an organized, well-thought-out plan is a “function of commitment to your clients,” he says. “It’s not fair to not have one — they trust their financial wellness with you. They need to know if something happens to you, that there is a plan and a process in place, and they will be taken care of.”

Another challenge is finding an advisor who approaches his or her business with a strategy that is similar to yours.

“You’re looking for a certain approach, tactic or investment strategy that is somewhat of a fit to yours,” Blonski says. “What you’re looking for is that culture fit. It’s more of the human dynamic and the chemistry between the retiring and new advisor.”

[See: The Best Podcasts for Financial Advisors.]

Determining Valuation of Your Business

The valuation of your company is harder to determine without an adequate succession plan.

“You’ve built a great business, and your heirs should be confident that, in the case of death or disability, that your estate will be compensated at a multiple of revenue or EBITDA that is fair,” says Regan, referring to the acronym for earnings before interest, taxes, depreciation and amortization. A buy-sell agreement, key man insurance or other assurance plans available from larger registered investment advisor, or RIA, platforms can accomplish this piece, Regan says.

In order to build a successful succession plan, advisors must first value the practice while considering factors such as client demographics, sources and growth rate of revenue as well as client retention, says David Johnson, a partner at Los Angeles-based Signature Estate and Investment Advisors.

Some mistakes advisors make include waiting too long and being forced to sell their business, overvaluing or undervaluing their practice, sharing too much unnecessary information with prospective external buyers and selling to the highest bidder without considering who is the best fit for clients, he says.

Having a succession plan in place increases the value of your business, says Julia Carlson, CEO of Financial Freedom Wealth Management Group in Newport, Oregon.

“Creating a succession plan requires the owner to think through and develop systems and processes for the business to run without them,” she says. “Having systems, processes and succession plans in place protects and increases your business valuation. If your business can run without you, it creates greater transferable value.”

Carlson says she worked with FP Transitions for her succession plan since the company offered an independent assessment of her business.

“Engaging an expert to help you with a succession plan will hold you accountable to getting it done,” Carlson says.

Some acquirers such as Merit Financial place a premium value on firms that have strong next generation talent in place, says Rick Kent, CEO of Merit Financial in Alpharetta, Georgia.

“It is never too early to begin discussion related to succession planning, and knowing your priorities is a key component,” he says. “Ask yourself, ‘What do I value most? Is my priority to maximize my enterprise value?'”

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