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Succession Planning for Financial Advisor - SignatureWealth Partners

Succession Planning for Financial Advisors- Start with the end in Mind

Succession Planning

What is succession planning? Why is it so important? What steps will you need to take to ensure the future of your clients, your team, and your business?

We’ve all heard the staggering numbers that there are more advisors over the age of 70 than under 50. If we’re not careful, we’ll see our practice grow old and have no one to pass the torch to. Think of our clients’ concerns. What happens to them if we’re not here tomorrow or we’re ready to retire before they are.

Succession planning is one of the most important discussions we should be having. It’s one of the hardest because we can’t envision the day when we’re not busy helping our clients live their signature life.

Succession planning is an effort designed to enhance and continue the performance of an organization. This is done by making provisions for the development of key people over time and the continuation of key processes. It clearly addresses what will happen each time a leader moves on, retires or leaves the company for any reason.

Planning for the future:

For those of us in the financial planning profession, we spend our days planning for the future. The future of our clients, our family and our staff. When it comes to planning for the future of our own businesses, we often fall short in effectively acting on implementing these plans for the future.

If you’re like most financial advisors, the hours spent getting ready for when you retire are pretty minimal. Taking the time to focus on a succession plan now will make all the difference when it comes to creating a business that far outlasts your career. Think of succession planning as legacy planning.

The idea of leaving the business you’ve spent a lifetime building may be unthinkable to you. Yet, it is critically important to start your retirement plan sooner, rather than later. For many advisors, it’s the old story of the shoe cobbler who makes shoes for everyone in the village but whose children go to school barefoot. A common theme among advisors is we all know what to do to help our clients plan their financial futures. Our own businesses just don’t get the same level of attention. We often don’t take advantage of some of our own best advice when it comes to succession planning.

As a financial advisor your entire career has been spent caring for your clients and their financial futures. Putting their interests above your own should last beyond the client’s lifetime. It should also last longer than the span of your career. Developing and communicating the details of a succession plan gives clients the confidence of knowing they will be taken care of, and it increases the value of the firm to potential future buyers. It also gives you and your staff clarity in identifying the objectives needed to take your firm to the next level and ensure its success after your retirement.

Now that you’re on board with the commitment to follow through on building or implementing a succession plan, let’s talk about how you can do it. Developing a succession plan doesn’t have to be overwhelming. In fact, the process can be broken down into five simple steps:

  • Decide on an external or internal succession;
  • Develop an overall succession plan with specific milestones;
  • Choose a potential individual or firm as a successor;
  • Create a structured agreement that includes a valuation of the firm; and
  • Map out the transition

See the big picture:

Over the course of the next several weeks, we’ll walk you through each of these steps in detail. You’ll get the tools you need to begin thinking about the long-term future of your business. You’ll also get the insight needed to begin putting your plans into motion. As you start to form the overall succession plan, there are several things to reflect on and begin to implement as soon as possible. Many succession plans can take 5-10 years to fully implement.

Thinking about several key factors now, you’ll have a better idea as to how you may want to structure your succession. Over the years, you’ve probably had numerous conversations with clients talking about their financial goals, fears, and desires for the future. When the focus is turned back on you, do you have a hard time practicing what you preach when planning for the future of your business?

Develop your succession plan:

As you begin to think about developing an overall succession plan, think about what’s most important to you. If you’ve spent time developing a culture at your practice based on service to your clients, you’ll want to make sure that any potential successor will approach client relationships the same way. If taking care of your staff is an important factor, you’ll want to think about the value that they add to your business as you develop the succession plan.

Questions to ask yourself:

You’ll also have to spend some serious time reflecting on your wants and desires for the future. What’s most important to you when it comes to your retirement? Are you looking forward to spending time with your family free from the daily hassles of a practice? Or are you wanting to stay somewhat “plugged in,” serving in a mentor role to those at your firm? Spending time thinking about these issues, you’ll be able to develop goals and focus on your overall plan. The reality is that every advisor’s succession plan is going to evolve continually as your business evolves.

By thinking about the future now, you can begin to start seeing your practice with the end in mind. When your focus is on the future, you begin to recruit and retain the kind of talented individuals who one day may grow into your successors. Constructing a strategic plan with specific milestones, you can identify and strengthen areas where you need to improve, ensuring you’re hitting the goals needed to stay successfully on track.

make a deal succession planning

Let’s Make a Deal: Types of Successors, Deals and Structures

Developing a succession planning process is one of the biggest and most important aspects of your career. One that requires the same kind of effective planning you utilize on a daily basis for your clients. Once you’ve made the decision to start planning for the future the first hurdle will be deciding on the best succession plan. Each of the plans have benefits and downsides. It is likely one plan will be better suited to the future of your firm than the other. In this post we’ll take a deeper dive into succession planning. We’ll chart out the steps it takes to create your personal roadmap for the future.

Deciding on a Plan:

Determining whether you want to do an internal or external succession plan can often come down to timing. When do you want to retire? How long do you have to plan? The internal succession planning process can take years. It often involves crafting your own career plan. And involves finding and developing the right advisor to bring into the firm. The external succession plan will be implemented in a much shorter period of time. Yet it requires more effort to make sure your clients and staff members are comfortable with the transition.

Internal Succession Plans:

When it comes to choosing a successor, advisors first need to identify the characteristics of an ideal candidate. Before you ask yourself if anyone on your staff could be a possible successor, you need to decide on the skills an ideal candidate would possess. You’re not trying to make just anyone inside your firm fit into the successor position. You’re trying to find the ideal candidate who fits into the mold you have created. It’s important you not look to specifically replicate yourself. You are unique and no one can replace you. By identifying the characteristics of the ideal successor you will find someone who fits perfectly, or identify someone internally. Then you can coach and train them in the specific areas that important for your successor.

Builds key areas:

A critical part of developing a successful internal plan involves positioning the right people in the right places. This part of the plan builds key area of the business. You will:

  • Outline career paths for your employees.
  • Offer competitive compensation plans.
  • Possibly change your business structure allowing for additional ownership tracks.

Once you’ve identified and developed a solid talent base, you can consider those employees as the foundation for an internal succession plan. An internal succession plan may take years to develop and execute. It will pay dividends in the long run in terms of the ease of your transition.

Your plan will revolve around attracting, developing and retaining the best and the brightest. Then promoting them slowly to become the next owners of your firm. Developing timetables for the succession candidate while measuring progress and working toward the ultimate goal. “The changing of the guard.”

External Succession Plans:

There are several reasons why an external plan might be the best option for your firm. The flexibility that comes with not having to spend years planning for an internal succession may be one of them. The key to executing an external succession plan is to identify a potential firm that will be a good fit.  This requires a great deal of due diligence. It means you’ll need to spend time talking to the new firm about:

  • Their investment philosophy.
  • How they service clients.
  • What their goals for the future are.

When spending time with the partners of the potential firm it’s very important to be sure they make you feel comfortable. Do you feel like you share the same core values? Do you feel like they would relate well to your clients? These are key factors to consider when evaluating a potential firm. Ultimately, your clients have become friends; in some cases clients can feel more like family. It’s important for you to be able to introduce them to your new firm with confidence.

Your ability to transfer the trust your clients place in you is determined by how confident you are with the group that you select. Once advisors choose a firm or individual to be their successors, they can then work to solidify the transition by creating a tailored agreement. The tailored agreement hinges on several key steps. Most importantly determining exactly how much your business is worth.

Obtaining a valuation for your firm:

The conventional rule of thumb of valuation, such as two to three times fee revenue, four to seven times earnings before interest, taxes, depreciation and amortization or one to two times the commission revenue aren’t really used. Instead, buyers are looking for long-term value. Measured by the size of the firm, a sustainable growth rate, human capital and client demographics. Always contact a valuation specialist who can help you in this phase of your succession planning process.

Once the valuation of your firm is completed, a realistic asking price will be determined. Then you will begin working on your timetables. Finally you will move into the phase of preparing your clients and staff for the major transition ahead.

Develop the Process:

Whether you pursue an internal or external succession strategy, your first step should be to give plenty of thought about your firm’s objectives. Then develop goals and a succession management process that your firm will follow. Every succession plan is different needs to be an individualized process serving as a game plan moving you forward. In order to get the best results, it’s important to tie the firm’s plan to the overall strategy of the business.

Your succession planning process will impact the firm’s objectives, serving as the guide for how the firm’s next leader will be chosen. Having a written plan in place means the process will remain the same. Even in the event of an unexpected scenario like the disability or death of a founder. A concrete succession leaves no room for infighting among staff members and leaves no questions on the table about how the succession process will take place.

communication is key

Communication: The Key to an Effective succession plan

Make no mistake, as important as all the other factors are, none of them matter if you don’t execute your succession plan properly. The value of your practice is going to be determined by the ability to retain your staff and clients. Communication effectively is the key part of executing your succession plan. As you’ve spent time determining the best course of action for your succession plan it’s important to do a gut check. Do you really believe that what you’re doing is going to be best for your staff and for your clients?

This is the time to be the leader that your staff and clients have come to depend on. We can’t stress it enough. Your leadership and communication will be the key to the success of your succession. It’s important to take time to have a well mapped out plan and communicate the plan as clearly, directly, and honestly as possible.

In his book, Dig Your Well Before You’re Thirsty, Harvey Mackay talks about the importance of preparation. These are the kinds of conversations that you’d be wise to script. This ensures all of things important to you are well articulated to this group of people you care about. Your clients and your team have become family over the years, it’s important they understand this is a big deal for them. It is also a big deal for you, and its important your team and your clients know you haven’t taken the transition lightly.

Remember, part of your valuation will be based the buyer’s ability to retain both your staff and your clients.

Communicating with staff:

When communicating with your staff, it’s important that you take a very personal approach. Each of your team members is going to receive this news differently. Some are going to see this as a betrayal, or a major sign of job insecurity. Remember to be direct and honest. This isn’t a time for fluffy words or a lack of clarity. You need to tell them in plain language what’s happening in your practice. This is a scary time for your team so it’s important as the leader you demonstrate confidence in your team as you move towards succession.

Tell your team members exactly what the succession plan means for their job. This may include increased job security and greater opportunities for growth. Particularly if you are going to be going through an external transition and working with a larger group. They could have an opportunity to take on an expanded role in a larger organization.

Your succession plan can also give them an opportunity for enhanced learning. For staff members who want to grow they will have additional resources and opportunities to work with new technology. The new organization may provide extra tools for them to use in serving your clients.

Be clear about the schedule for the transition. It could be several years, which may ease some of the concern of team members. Especially if they haven’t been notified ahead of time or been a part of the discussion. Also important is to let them know what role you’ll play in the transition, what role they’ll play in the transition, what role your succession partner will play as well.

Keeping your employees happy, confident, and on track will lead to a much better outcome for everyone.

Communicating with clients:

Once you’ve mapped out your communication plan and strategy with your team, it’s time to communicate your succession plan with your clients.

There are several ways to communicate your plan:

  • In person
  • By mail
  • By phone

What is best will depend on each client’s communication preferences. Take into consideration any logistical concerns, the number of clients you have as well as the time table you have put in place.

In person:

If you have time or if there is an internal succession partner, you can do this during your regular review process. You can talk to your clients about the team member that they will be working with, as well as any other service-related items important to convey in person to both the client and your new associate.

By mail:

Obviously, for your top clients you’re not going to send out a letter announcing a change. For clients that you believe it’s appropriate, you certainly can include a letter announcing the changes. Be sure to include the schedule, the benefits, and answers to frequently asked questions.

By phone:

Making a phone call to your clients to begin the process of letting them know your succession plan. Script this call with some bullet points to make sure you convey everything that is important to the client as part of the transition. Specifically mention the benefits to them.

Regardless of how you choose to tell your clients, you must focus on what the benefits of the transition are for them. In many cases, the advisors we work with have already had clients ask them what their plan is. This gives you an opportunity to lay it out for them and to bring clarity and confidence to their plan as you execute yours.

​Ultimately, you want to position this transition as a continuation of care for your client. You’ve come to care about these people, their goals are important to you. As important now as they’ve ever been. Part of your process has been designed to help you be able to continue to provide for them even after your own retirement.

Answering questions:

​Clients are bound to have questions, develop a list of frequently asked questions you can provide to them. We suggest you schedule these meetings or calls and do them in stages. It is important to be mindful of your specific community. Try to inform clients in similar social groups together or as quickly as possible.

​When it comes to putting it all together, it’s important that you remember your responsibility as a leader. If you’ve gone through the process properly, you should be excited about the future of your practice. You’ve taken care of your team and your clients. As part of your succession plan you’ve selected the ideal opportunity for them so they can continue to be taken care of after your retirement.

The importance of confidence:

We cannot reiterate enough the importance of your confidence and excitement when delivering the news to your clients. They’re going to be excited for you. Everyone works to achieve retirement. You helped them toward their retirement goals and they’re glad that you get the opportunity to retire well as well. Clients want to know that they’re being taken care of by someone you trust.

Obviously, you’ll want to thank them for the relationship. And to let them know you’ll still be a client of the firm, and attend any client events. You’ll just be on their side of the desk from now on. It’s an extremely positive development for clients who’ve been wondering and waiting to get clarity about who will be taking care of them. They trust you to have made a good decision. As important as all the other factors are, none of them matter if you don’t execute your succession plan properly.

Putting it all together

Once you have accomplished all the steps in your succession plan you will find the transition will unfold smoothly. Your staff will be supporting you fully. Your family will be happy to know that your retirement years are planned for. Most importantly your clients will know you have put their needs first and foremost as part of your plan. Our mission is to help our clients live their signature life. As advisors, we must live our own signature life, including taking the appropriate steps to secure our own retirement. Don’t forget to take the appropriate steps, starting now.

Opinions expressed in this article are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.

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