Succession Planning: Are You Proactive or Reactive?

Journal of Financial Planning; November 2014


Financial advisers work tirelessly to help clients leave a secure legacy for their families and loved ones. They build relationships, help select the right mix of investments, insurance, and other financial products, and work diligently to ensure that their clients are cared for no matter what life has in store.

This means confronting many hard truths for the client, and through it all the financial adviser is there. Despite this ability to have these difficult conversations about the future, many financial advisers do not want to face the hard truth that their own career cannot go on forever, and that, at some point, another financial adviser will be working with their clients.

Firms are faced with the flip side of that hard truth—at some point, their top financial advisers will be retiring.

Plan or Scramble

There are two ways to approach this hard truth: by proactively planning, or by reactively scrambling.

Reactively scrambling means pushing off the conversations around how to transfer the value that is represented in a retiring adviser’s book of business, holding on to the idea that an adviser will never retire. It means rushing to connect a retiring adviser with a hastily picked successor without taking the time to develop meaningful relationships with the retiring adviser’s clients. It means focusing only on the retiring adviser and not considering the opportunities that succession planning creates for advisers looking to accelerate their businesses.

This approach leaves a lot to be desired. Approaching succession in this way will rarely create any positive momentum; you’re just working to keep the situation from getting worse. If you are reacting to succession planning right now, you are missing out on a golden opportunity to expand your firm’s business, while rewarding both retiring and up-and-coming advisers. Before we talk about acting proactively, though, we need to understand the succession opportunity.

The Succession Opportunity

According to a 2013 survey by Mathew Greenwald and Associates and LIMRA, Census of U.S. Sales Personnel, the average age of a financial adviser is 52. Some may argue that people are working longer and longer, but most would agree that 52 is a lot closer to the end of the average career than the beginning.

Despite the financial adviser’s focus on preparing his or her clients for the inevitable, 90 percent of advisers do not have a written succession plan in place for their own inevitable (and often looming) retirement. Many feel they are not being helped to correct this problem—81 percent of advisers say that their firms do not do a good job in planning for succession. Finally, 52 percent plan to “reduce activities” as they near retirement. 

These statistics paint a potentially troubling picture. Compounding the issue is that many are seeking to dial down the time they spend on their business near the end of their career, leaving less time to properly plan for their succession.

Proactive Planning

There is a real opportunity in succession planning if you are willing to get proactive. That means reaching out early and often to start conversations around succession. Well in advance of retirement, your firm needs to be working with both your potential retiree and the individuals who are going to be joining and eventually purchasing the practice. It won’t happen overnight; it will be a strategically planned project that runs for several years from start to finish for every succession, ensuring a smooth transition for all parties involved.

When planning proactively, the focus isn’t only on advisers who are already in the process of retiring. Instead, the focus needs to be on seasoned advisers who are starting to or thinking about “slowing down.”

Proactive succession planning takes two stakeholders. These stakeholders can come from a number of sources:

Top solo practitioners. These driven individuals have already established themselves as successful financial advisers. They run their practice like a business, but they may be reaching a plateau that they can’t work their way past. As a result, they are seeking an experienced partner with complementary skills that can take them to the next level.

Rising stars. Driven and ambitious, these young up-and-comers are looking for growth opportunities and want to be a part of a team. Partnering with an established adviser nearing the end of his or her career will be an appealing opportunity to this motivated group.

Established teams. A diverse and functional team with the capacity to take on additional scale can be a great partner for a seasoned adviser. With a broad product expertise and room to grow, these groups are willing and able to capitalize on new opportunities.

New recruits. Matching up a fresh recruit who is willing to put in the hard work and partner with a successful, seasoned adviser is another possibility. The right recruit with a strong entrepreneurial spirit can bring a lot to the table.

Bringing Advisers Together

Once you know who the stakeholders are, it’s time to do the work and put a plan in place. When you have identified a potential successor for a seasoned adviser, the first step is to bring them together for a strategic consult. This is to gauge the compatibility of the two advisers, understand their objectives, and help them determine if there is a fit. 

If both parties are interested in moving forward, the next step is a defined “try out” period. The seasoned adviser and potential successor work together with clients to get a better understanding of how their personalities and work styles interact, and whether the successor would be a good fit for the practice. This period can last from 60 days to a year—what’s important is that there is a defined period with clear objectives and activities, such as joint case work, client introductions, and meetings with internal members.

If all indicators are good, this is when a decision needs to be made by the seasoned adviser and the potential successor. Given the complex nature of the succession planning process, it is often wise to bring in a third party to oversee the terms of the deal. 

Once the deal is structured, the documents are signed, and the ink is dry, it is time to begin the transition. Depending on the preferences of the participating advisers, this process can be as rapid or as gradual as they desire. Some successions see advisers purchase books of business outright, while others see a partnership forged that lasts over months and years. There is no one right answer; every situation is different.

Case Study

Joe Smith (not his real name) is a real MetLife Premier Client Group adviser. He was a solo practitioner from 2003 to 2008, and he was successful by many measures at age 36. He had grown his practice to the point where he was consistently over $350,000 FY GDC, but he was starting to plateau despite expanding his scope of work by becoming a planner for the special needs market. In 2009, he took a step to move past that plateau by creating a joint work agreement with a partner. 

Often times, forming an adviser team is the crucial first step toward new growth and an eventual smooth succession. According to a 2011 Moss Adams study, team-based practices generate more than twice the revenue per household than solo advisers. 

That was the case for Joe. In four years, his team grew their FY GDC from $460,000 to nearly $950,000, while his personal FY GDC rose to more than $500,000. In 2012, they recruited an inexperienced adviser to help grow their practice while working with their clients and becoming familiar with the business.

Joe’s team is set up for continued growth as he enters into the sunset of his career. By leveraging cross-selling strategies, continuing to recruit to create a full-service wealth management practice with complementary expertise, and aquiring additional practices, the team is able to rapidly expand at a rate that an individual adviser simply could not. At the MetLife Premier Client Group, advisers on teams grew at a rate 10 times that of their solo adviser peers in 2013.

A few more years down the road, Joe and his team will set up a continuity plan, obtaining a valuation for their practice and establishing an equity stake for the founding members. When the time is right for Joe to retire, he’ll communicate his plans, have the practice re-valued, and get the appropriate legal agreements in place. The team he assembled over the years will continue to seamlessly service his clients, maintaining the prodcutivity they had built, facing a bright future.

Start Planning Proactively

If you’re reacting to succession planning today, here are a few simple steps you can take to change the game and start planning proactively. 

  • Communicate this opportunity to your firm, engaging your advisers as you work together to preserve what they have built. 
  • Take an inventory of your advisers, identifying those who are getting near the end of their career, as well as those who could potentially work with them in a succession. 
  • Develop your talent management and recruiting strategy to reflect a focus on identifying successors.

Although it takes time and effort, proactive succession planning pays off for everyone involved.

Daniel J. Flynn leads the Talent Acquisition and Advisor Teaming strategy at MetLife Premier Client Group. He has more than 20 years of experience working with top advisers and field leaders in the insurance, independent, and wirehouse channels.

Succession Planning