The Family Psychology of Financial Advisor Succession

Most businesses fail to reach their 10th anniversary. Financial advisory firms fall in line with these statistics. As a result, thriving practices have considerable value because they demonstrate they have met a market need, generated new clients, have adequate cash flow, and can successfully hire and retain employees.

Yet as these business scale and grow, their owners ultimately need to think of their future exit and how it will affect their entire family.

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When it comes to deliberately transitioning a business, 73% of advisors lack a formal plan to do so, according to a 2018 Financial Planning Association and Janus Henderson Investors study. Succession planning is paramount on many advisors’ minds, yet a majority fail to initiate the steps to successfully prepare for the future. While procrastination is often the cause, there can be other hidden challenges.

Advisors should tackle the following steps to help them successfully transition their business:

— Know what letting go means.

— Make arrangements with spouse and family.

— Set your estate plan.

Know What Letting Go Means

A study by the Exit Planning Institute in 2013 revealed that 75% of business owners who sold their businesses regretted the decision within the first 12 months. They may cite the sales price as being inadequate or a feeling that they simply sold at the wrong time. But the reality is more basic: They simply were not prepared to move into the next chapter of their life.

Entrepreneurs enjoy many perks while starting, growing and scaling their businesses. They create an identity with their firms, often referring to them as their “baby.” They may enjoy a certain amount of prestige in their community as the founder of the firm, receiving honors and social invitations as a result of their influence.

When the business sells, many of these perks abruptly stop. As a result, the sale of the business can create unsettling emotions, similar to parents who face the “empty-nest syndrome” when their children leave home and start college. Unlike having an empty nest, where many peers go through the same experience simultaneously, business transitions are individualized events. Therefore, anxious founders may find few people offering sympathy, especially if the sales price is known to be substantial.

More pervasive is another issue in common with parents of college-bound children: While they were so busy raising their children and meeting their daily needs, they failed to simultaneously nurture the relationship with their spouse or partner. Similarly, while business owners may receive their ideal sale price, they may not enjoy the benefits of the sale with their family.

Make Arrangements With Spouse and Family

In some cases, the divide between spouses can be substantial, resulting in marital distress and discord.

This can manifest in several ways, including a lack of agreement in plans such as:

— One partner wants to travel the world extensively, while the other prefers to stay home to be closer to children and grandchildren.

— Changing homes, but arguing about downsizing versus creating an expansive family compound.

— A stay-at-home parent may struggle with the loss of their free time now that the business owner no longer goes into an office.

— One partner may desire significantly more companionship to compensate for the loss of social interaction.

Often, a business owner is not accustomed to spending much time with their spouse and family, so they may frame newfound anxiety in terms of sales price or the timing of the sale. Sometimes, they direct their stress and frustration inward, resulting in new stress-related health issues. Some business owners will not make the connection between their stress levels and their lack of preparedness and ultimately believe that the transition itself caused their angst.

Fortunately, there are many steps that can address and alleviate these hurdles:

Plan ahead. Just like it’s known when a child will go to college, a business owner knows there will be an expected transition date and can begin conversations well in advance.

Engage with an exit coach. Partnering with a coach experienced in more than just the numbers can create a safe environment to discuss private concerns regarding a transition.

Consider all exit options. Most advisors believe they must sell their practice outright to realize its value. However, some advisors may prefer to work until they can no longer do so but scale back their availability. By shedding all clients except their top 20%, they can often right-size their practice to fit their desired lifestyle and financial needs, without the stress of an outright sale.

Talk with your spouse. An exit coach can be invaluable to learn how to start key conversations about what the next chapter will entail to create mutual excitement with a spouse. Transition does not mean that an advisor no longer has purpose, but rather that they can decide what they want to do with the time and new opportunity afforded to them. That could include trying new hobbies or volunteering with a spouse.

Seek counseling. Many people find that big changes are time to take stock of their lives and adjust as necessary. Marital or relationship counseling may be part of the transition plan so that a couple can move toward a common path. Equally important is that family members give each other sufficient space to pursue individual dreams and hobbies.

Make incremental changes. Uprooting your entire life overnight can be a recipe for disaster. The sale of a practice is a significant stressor in its own right. So, much like an advisor would counsel a widow or widower to not make major decisions immediately, so too should they pace themselves in undergoing any other significant lifestyle change while transitioning the business.

Create interim roles. Founders may choose to give back to other entrepreneurs through advising, mentoring or becoming angel investors. They may choose to become a board member for another company or engage in philanthropy with a local charitable organization. This can allow them to retain their entrepreneurial passion and community prestige while transitioning to a family-friendly lifestyle.

Set Your Estate Plan

Finally, all business owners should have a separate estate plan that complements their succession plan. This plan can provide a financial backstop to fulfill both the transition and the estate needs until both plans have been successfully executed.

Change is always hard, and difficult family dynamics can complicate any business transition. However, a holistic view of the challenge can lead to significant satisfaction, making the next chapter a true page-turner.

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The Family Psychology of Financial Advisor Succession originally appeared on usnews.com

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