The Not-So-Great Escape—
Trends in Succession Planning

The escalation in the number of financial advisory practices and the seasoning of the advisor population have been two of the most notable trends in the advisory industry in recent years. According to “Evolution Revolution” report, about 520 new investment advisory practices on average have debuted every year since 2001. And those advisors are older and more experienced. The advisors who participate in our survey have a mean age of 53, though some are quite a bit older. About one third (33%) of financial advisors began their business 16 or more years ago, when the industry was in its infancy stage. Now many of those financial professionals are looking toward retirement. As a result, the unavoidable issue of succession planning has become crucial to advisors.

Chart 1: Advisor Median Tenure in Business (2006)

However, when analyzing the multiple responsibilities advisors face, succession planning is an often overlooked issue. About a third (32%) of advisors don’t have a succession plan and are in danger of losing their competitive positioning to companies with future-ready planning. “One of the challenges investment advisors face is planning long-term firm survivability. It’s especially true among smaller firms with fewer choices for replacing principals. These firms have more difficulties attracting and retaining staff,” says Lane Johns from Evensky & Katz Wealth Management in Coral Gables, Florida.

Chart 2: Advisors' Succession Plans
(2005 vs. 2006)

By examining the types of succession plans that are most appealing to advisors, there is an interesting trend. Most RIAs with succession plans would prefer to sell their practice to an existing partner (29%) or existing employee (12%). The takeaway here appears to be that advisors would prefer to sell their business practices—their largest financial asset—to someone they know and trust.

Follow the leader?
As advisors first think of leaving their practices, they typically start to ponder the legacy they’ll leave, wondering who will be the new leader of their firm when they step down. Therefore, mentorship to younger advisors is absolutely vital. The next generation of financial professionals expects to see a clear career path and opportunities to grow. To potentially take charge of a firm in the future and run it effectively, younger advisors need a thorough understanding of the ins and outs of running an advisory practice. Today’s older principals need to think about appropriate candidates to run their firm in the future and provide suitable training for potential business owners. The good news is that in 2006 advisors stepped up to the plate in providing employees with career growth opportunities. Advisors took the initiative to create more mentoring environments for their employees–such as boosting employee industry knowledge through seminars (46%), sponsoring employees for continuing education courses (35%) and developing internal education programs (35%).

Preparing a practice for potential sale
In contrast to the advisors who want to sell to a known entity, about one fifth (18%) of financial advisors are considering selling their practice to a third party. For those professionals, practice valuation and preparing a business for a potential sale have become important topics over the past few years. But if in the past basic growth revenue multiples worked well for valuation purposes, it’s now becoming more important to plan ahead for exiting the business and take extra steps to get ready for a potential sale. About a third of advisors (32%) are preparing by creating standardized practices for an easier transition, 32% are seeking to increase profitability to make the business more attractive and 27% are focusing on having a more profitable client base. However, many advisors (40%) are not doing anything to prepare their business for potential sale.