Succession Planning for the Business of Client-Relationships

Is agency value vested in the agency or the advisor?

by Brian Heapps, CLU, ChFC

Succession planning is a difficult topic to broach with financial professionals. It always seems like it’s somewhere down the line, a long way off. We spend so much time helping our clients plan for their financial futures, we often don’t take the time to focus on our own until it’s too late and the options are limited.

As recently as 10 to 15 years ago, the predominant view in the industry was that value was vested in the individual financial professional, and not in the practice. As a result, owning a practice was viewed more as a job than as a business.
However, that environment has rapidly changed due to a focus on recurring revenue sources and a more competitive acquisition landscape. While more financial professionals view their practice as an entity that will survive them and continue to serve the firm’s clients, the value that financial professionals can build has gone unrecognized for too long.

Financial professionals operate within a unique business model. Unlike a manufacturing company or a wholesale supplier, your business value lies not in your practice’s fixed assets, inventory, or intellectual property; but, rather in your client relationships. This creates challenges in devising succession strategies that maximize value to you, while balancing how those relationships will be transitioned to your appointed successor. At Signator Investors, Inc. we place extra emphasis on putting the issue of succession planning front and center.

Aging Demographics

One of the most significant factors facing the financial advisor population is the aging demographics of both clients and advisors. Nearly one-third of advisors are age 55 or older and one-quarter of advisors plan to retire in the next 5-10 years according to The Cerulli Edge Advisor Edition 4Q 2014.

This trend has turned equity and succession from a topic advisors should consider to a requirement that all advisors, RIAs, and broker dealers must work together on to ensure the continuation of businesses and service to clients for future generations. For advisors and firms that don’t prepare, the results could present serious risk to their clients and businesses. However, there is enormous opportunity to be gained by those who do prepare.

Recently, we engaged Mathew Greenwald and Associates to learn more about how the industry views succession planning. The goals of the study were to gauge financial advisors’ views toward succession planning, including the steps they may have taken to prepare for succession, and most importantly what aspects of succession planning they were struggling with and what we as a broker dealer could do to help.

The survey represented responses from financial professionals who were working either as an affiliated producer or as an independent; planned to retire within 20 years; and had worked in the financial services industry for at least five years, owned at least half of their practice and generated at least $80,000 in gross income in the 12 months prior to the study. A total of 500 respondents completed the questionnaire, including 191 affiliated career agents, 250 independent broker dealer representatives, and 59 independent financial planners or advisors.

Are planners too busy to self-plan?

Following are some of the key findings from this study, along with some tips and advice for how to address the concerns raised by the advisors surveyed.

Eleven percent of advisors studied have completed a succession plan. About a third have started but not completed a plan (34%), while 44 percent said they’ve thought about making a plan but not started one; an additional 12 percent haven’t even started thinking about creating a succession plan.

While many advisors (81%) say that the industry does not do a good job of helping plan for succession, most admit that they, too, are a roadblock in planning for their succession: 55% agree that they are too busy with their practice to think about succession planning, and 53% agree that they have procrastinated too much when it comes to this issue.

These numbers help highlight the need for firms and broker dealers to take a more proactive approach in assisting advisors from start to finish in the process. While the majority of advisors know succession planning is important, they just aren’t completing the necessary steps. At Signator we decided that one of the most valuable resources we could provide our advisors was to assist them with this process. With that in mind, we created not just a comprehensive four step equity and succession process- determine, protect, grow, realize- but also templates and resources to help advisors actually put a plan in place. Rather than having our advisors go to outside attorneys or valuations companies, we now provide them with assistance in identifying a successor, templated continuity and succession planning documents, and valuation tools.

Equity and succession should be viewed as a career-long process rather than a one-time event. The earlier you begin to consider and implement components of equity and succession, the more likely you will protect and retain your clients, maximize the value of your business, and ensure a smooth transition of your practice to a willing successor.

Having a well-defined plan can also yield present-term advantages. Both current and prospective clients, especially those clients younger than you, will be reassured to know that there is a plan in place for their money that reaches beyond your own career.

Finding the ‘right’ successor

Advisors cite a number of serious concerns in both the financial and client service aspects of succession planning, including obtaining cash for their business (80%), maintaining relationships with key clients (70%), financing a transition (69%), annuitizing their business (69%), and bringing along a younger rep (66%). 56% list leaving clients with a lower level of service as a concern, and another 47% agree that they do not believe they will be able to find someone who will service their clients as well as they do.

In the past, many exit strategies focused on liquidation of the business and its assets. As recently as the mid-1990s, financial professionals provided clients with a list of two or three financial professionals and said “good-bye” when it was time to retire. In certain cases, owners simply decreased the number of hours they worked and the level of services they provided, opting for an attrition-based exit strategy.

To ensure that advisors’ businesses don’t follow this attrition-based exit strategy, broker dealers need to be more proactive in helping advisors with the actual execution of their plan. We identified three ways to help advisors overcome their concerns about finding the right successor and properly transitioning their clients and businesses.

The first is to assist with identifying the right successor. We all know that fewer and fewer younger advisors are entering the business, so the ability to play “match maker” between advisors is a key value-add a broker dealer and local firm can provide advisors. The second way broker dealers can help advisors with the execution of their plan is to provide guidance on how to properly set up their business, including their organizational structure, contracts, and compensation flow.

The proper business structure and defined succession plan will provide younger advisors in the practice with a clear vision of how they can achieve equity and properly transition the business over time. The third component is financing the transaction. While there are third party options available to advisors, we found that offering advisors financing for the purchase of practices helps alleviate the concern of having to obtain cash for the purchase and lets the advisor focus on maintaining the client relationships and integrating the practices.

By linking a current practice owner to the energy and talents of the next generation, the future opportunities are tremendous. The key is to begin this process early. By doing so, you can build a bridge that both maximizes the value of your practice and ensures that your clients are taken care of by a professional who shares your values.

Establishing an accurate valuation

Many advisors realize the importance of an accurate valuation of their business, but do not feel knowledgeable about how to obtain one.

• Valuation of an investment business – 83% feel it’s important, 42% not knowledgeable how to obtain one
• Obtaining a valuation of a fee-based business – 72% important, 49% not knowledgeable
• Obtaining valuation of an insurance business – 66% important, 56% not knowledgeable

Practice valuation is another instance where a broker dealer’s equity and succession platform can really be helpful to an advisor. A strong equity and succession program will offer access to a third party, such as FP Transitions, to develop a valuation model that takes into account investment and advisory products under the traditional valuation approach, as well as a component based on the insurance product sales of a financial representative’s practice.

Many advisors understand the importance of getting an accurate valuation, however many don’t know where to start pulling the information they need to start the valuation process. This is where an internal team dedicated to equity and succession can be a great resource for advisors.

At Signator, we have someone on staff dedicated to work with advisors on collecting revenue numbers, client demographics, account information, and other key pieces of information to help with the valuation. By assisting with this process, we are also able to help advisors identify the key factors that help increase the value of the practice. We then work with the advisor on improving those factors to increase the value of their business.

Once you complete an accurate third-party valuation and have a firm grasp on what your practice is worth, you’ll have a better understanding where you are in relation to the steps in forming an effective equity and succession plan. This will allow an advisor to take the necessary steps to protect the value of the practice that has been built. This way, even if an exit strategy is still years down the road, clients will feel comfortable knowing a succession plan is in place.

A successful transition of your business from one generation to the next can stand as the hallmark of a successful career. For a profession that prides itself on helping its clients prepare for the future, it’s time that we start preparing for our own. It all starts with taking the time to plan – before it’s too late. ◊