The stock market over the last decade has driven up the valuation for many registered investment advisor firms, or RIAs, to unprecedented levels. As a result, many financial advisors have worried less about the internal organic growth required for succession planning than they have in other periods.
But as the great physicist Isaac Newton said, “What goes up must come down.” And with inflation at historic levels and the Russia-Ukraine war roiling markets, advisors must recognize that their ultimate plans may require a more proactive effort. Although a solid succession plan requires many detailed steps, here are six quick, important tips for advisors to consider as they embark on this project:
— Start today.
— Begin with the end in mind.
— Get a valuation now.
— Get professional help.
— Build in contingency plans.
— Don’t let easy gains be a crutch.
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Start Today
Seriously. If you wait until tomorrow, you are already a day behind.
Many advisors may feel that they are years away from contemplating retirement. However, getting ready today actually will make you more money than you dreamed possible because you will have more years of the right activities working in your favor. You may even adapt your final plan because the successes that will come your way from consistently and methodically growing your firm will open new doors.
Begin With the End in Mind
When you give yourself an ample amount of time to achieve your goals, you have the luxury of thinking bigger. Early on is the time to assess what you believe is the most successful outcome for your firm.
Some key questions to address include:
— Do you have a dollar figure in mind for the ultimate value of the firm?
— Would you prefer to have an outright sale of the firm or groom a successor from among junior partners?
— Would any or all of your children have an interest in continuing the firm into the next generation?
— Do you want to exit immediately or more slowly transition away from the main duties of the firm?
One additional and often less discussed part of this step is to begin defining what you want the next chapter of your life to look like, post-succession. For many advisors, as well as business owners, their firm is the focus of their daily life. Psychologically, losing that main focus can be unsettling. Transitioning from day-to-day professional responsibilities to a new adventure, whether it’s world travel, golf outings, philanthropic activities or other worthy goals, can still feel like a loss. So mapping out the first steps of your new life is crucial.
Get a Valuation Now
Establishing your starting point is just as important as planning out the ending. You need a baseline for the distance that your firm must travel to allow your goals to materialize. Best of all, you’re also creating a road map to ensure that you will reach your planned destination.
Advisors often learn that the gap is wider than they expected. Perhaps they allowed the sustained values in the stock market to overshadow a lack of new client acquisition activities or an aging client base. Procrastination or health issues can also limit the timetable. Understand the lay of the land so that you can make course corrections that enable a dignified transition.
[Read: Financial Advisor Disclosures to Know.]
Get Professional Help
Just as a doctor consults a medical colleague for an objective opinion, so, too, does a financial advisor require professional advice.
Many financial and insurance advisors have additional education and expertise in succession planning. Their specialized experience can be invaluable to establishing the goals necessary to achieve your desired results.
A succession coach can make sure that you are weighing all your options. For example, cutting back on some of your firm’s services or reducing the number of clients may seem counterintuitive, but doing so may free up time to focus on activities that maximize the value of your firm.
It is equally important to consult a CPA or tax attorney to understand the tax implications of each option, as well as an estate planner to make sure the plan continues unimpeded as your successor takes over.
Build In a Contingency Plan
The best way to achieve a successful outcome is to reduce the risk that unexpected events could derail your plans.
A national study by the Exit Planning Institute found that while 64% of business owners believed that there would be no emotional impact from selling their business, the reality was that 75% of business owners experienced seller’s remorse in the 12 months post-transition. They may have come to believe that their business was worth more than their selling price, for example, or that they should have timed the sale differently.
However, only 4% of the study participants had taken the time to plan their next chapter. For the others, anxiety associated with a perceived loss of identity may have been exacerbated by family dynamics. In such cases, health issues may emerge as well, further complicating emotions about the sale.
Unfortunately, it may be too much of a challenge to change course and go back to the way things were. Avoiding regret starts with having your own financial plan in tip-top shape, including:
— Fully funded retirement plans.
— Disability insurance while you are still earning income.
— Long-term-care insurance to avoid depleting savings.
— Life insurance, especially if the succession strategy involves a buyer making a series of payments. This coverage can provide important tax leverage and potentially creditor protection in some states, should the buyer default on their obligations.
Finally, if your firm’s valuation is dependent on a strong stock market, be sure to diversify your sources of income. You would never counsel a client to keep all their retirement savings in a single stock investment. Shouldn’t you take your own advice?
Don’t Let Easy Gains Be a Crutch
A whopping 73% of financial advisors have not created a succession plan, despite 93% of them recognizing that it poses at least some risk to their financial livelihood, according to a Financial Planning Association survey. Meanwhile, the stock market’s successful run has allowed too many advisors to sidestep this responsibility. Preparing for succession can give you the personal clarity and confidence to achieve greater prominence in your field.
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6 Succession Planning Tips for Financial Advisors in 2022 originally appeared on usnews.com
