The Time for Succession Planning is Always Now. Here's Why

Planners have a present-day imperative to consider their firm’s future

Scott Hanson, CFP®, is co-founder and CEO of Allworth Financial.

In the next decade, nearly 40 percent of the adviser headcount today will retire, according to Cerulli’s 2020 report, “The Impending Succession Cliff.” Among the 103,000 advisers retiring in the next 10 years, 26 percent—or more than 26,000 advisers—have no succession plan. This wave of retirements was projected to kick off at the beginning of 2022, however, over the past few years, we’ve seen RIA firm owners contend with pandemic-related obstacles that led to many considering the fate of their businesses if they were unable to lead. Some of the most common triggers for succession planning are health scares, and owners of small RIA firms began assessing how an unexpected health risk like COVID-19 would impact their firm, employees, and clients. For many, this would be devastating and caused them to take a more critical look at succession planning.

At the same time, there is a renewed demand amongst consumers for financial planning services, jobs of which are expected to grow at a faster than average rate of 7 percent through 2028. Older advisers may be reluctant to let go of the reins during such a critical moment, but to take advantage of this opportunity, it is critical to succession plan in a timely and strategic manner. Not only will this provide more time to evaluate options, but it will give RIAs more control and autonomy when setting the terms of their succession.

Why Have a Succession Plan?

Having a succession plan can help facilitate your retirement, but it can also benefit your business in the present. In addition to aging and the health complications that may arise in an adviser’s career, there are many reasons why it’s a good idea to have a plan in place sooner rather than later. One major factor that advisers cite is the complexity of running one’s own business. Many advisers in their 50s and 60s especially would prefer to focus on their clients during the final chapter of their careers, instead of remaining responsible for all operational, technological, and marketing aspects of the business. Sometimes, an audit or tech issue may compel an adviser to realize that they would like to have more support with the business operations of their firm.

Related: Succession Planning Is About More Than Retirement

Lastly, the financial considerations of succession planning present an extra sense of urgency. RIA valuations hit an all-time high in 2021 and, according to DeVoe & Co.’s 2022 RIA M&A outlook, 39 percent of respondents said they expect valuations to increase even further in 2022. If an adviser is interested in selling their business, now is the perfect time to begin evaluating offers. Given the historical confluence of factors, there may not be another comparable opportunity for a long time. Getting ahead of financial planning may help advisers secure their family’s financial future without having to compromise.

Many advisers are independent because they don’t see a better way to run their own business. But I would recommend thinking about the things you enjoy doing versus the things you don’t enjoy doing. Think about how much of your day it takes to complete the tasks that are less fulfilling and imagine if all of those tasks were off your hands. In my experience, most advisers want to spend time with clients and solve complex problems, rather than lead onboardings and run payroll. Being part of a larger firm can give advisers back that ability to focus.

Considerations for Developing a Succession Plan

Succession plans are a collaborative process and are not one-size-fits-all. To get started, advisers should consider their personal and professional priorities for the next several years and run a succession scenario to its completion. Think about who will run client communication in the event of a health issue. If transferring a practice, who will be financing the transition? Would you prefer to remain independent or join a more integrated firm? Integrating with a larger firm can help to modernize the RIA’s business model while providing the owner with flexibility during their final years in the profession. While this requires relinquishing some control over the firm and is not the right path for everybody, many advisers like to remain involved even as they begin to share the reins. Partnering with an RIA firm can attract new advisers, while opening professional opportunities for those already on board, increasing employee retention and recruitment.

If an adviser is considering naming a younger successor to take over the firm, they must consider the bumps in that road as well. For example, the younger adviser can use their leadership potential to start their own firm, even taking some of your clients. Other times, an adviser can rely on the clients they inherit from the previous advisers and cannot acquire new business. Additionally, financing this change can complicate the transition.

No matter what your succession plan looks like, it is crucial to consider the worst-case scenarios. A succession plan is meant to safeguard a business and as well-intentioned as a plan might be, sometimes factors outside of the adviser’s control can make one path more appealing than another.

Key Benefits of Integrator Partnerships

Integrators take care of employees in addition to clients. The reality is that not all staff will stick around regardless of how you move your business forward. With integration, those who do will become employees at a larger organization and have more opportunities for career advancement, thus making it easier to attract talent. 

Furthermore, integration is a good way to increase the technological sophistication of an adviser’s business. An integrator firm instead has many different point people with expertise in areas such as data, cybersecurity, marketing, and more. This combination of specialized expertise and experience will help streamline the relationship between the firm and the client.

When to Begin Succession Planning

The best time to begin succession planning is when an adviser’s business and health are in peak condition. This will provide more time and leverage to evaluate options and may also yield a higher valuation. If you are an adviser within 10 years of retirement with a healthy practice, now is the perfect time for you to secure that high valuation. If by the time an adviser begins succession planning, the business is already beginning to decline, valuations could decrease. Do not wait until attrition rates increase or the head adviser is unable to practice to begin succession planning. The pressure on an adviser in a precarious position is just too high and may cause them to settle for a less optimal plan.

Deciding on Business Structure

Advisers preparing to make the switch should keep their business models simple. Complicating the business will make it harder to eventually collaborate with somebody else. Additionally, firms focused on behavioral finance will be better off down the road.

Finally, have as many conversations as you can. Speak with advisers who have already transitioned, as well as potential acquirers, to help ascertain your succession goals. Just like with any major life decision, ask for feedback from mentors and colleagues while in the consideration phase. It isn’t until you reach the next phase of narrowing down who you are going to speak to that you begin to form a decision. Use this to narrow down your options and even consider hiring a consultant to help you process the information.

Even if retirement is further down the road, advisers who take a longer planning approach will benefit from greater control and more options. The process can take a long time, but taking your time will prove to be worth it in the end.

Practice Management
Succession Planning
Professional role
Lead Financial Planner
Career stage
Learning / Aspiring