Almost 70 per cent of advisory practice owners believe
a successful succession strategy will take five years or less to implement, but
this time-frame should span 10 years in order to maximize practice value,
according to new research.

On the basis that many advisors do not have a full 10
years to plan for practice succession, the study by Aite Group, entitled The Efficient Frontier of Succession:
Maximizing Practice Value, has highlighted  “actionable steps” financial advisors can take to improve the
value of their practices and approach to succession planning.

With one in ten financial advisors being over 60 years
old, it is “no secret” that succession planning is an important aspect of the
wealth management industry, said James Poer, president of NFP Advisor Services
Group, which commissioned the survey.

“Just as advisors utilize the efficient frontier to
help maximize investment outcomes for their clients by optimizing the balance
of risk and return to fit a client’s time horizon, it is critical that they
apply similar thinking to help maximize the results of their own eventual
practice succession,” Poer added.

Advisors with
three or more years until transition

Advisors typically think in terms of revenue or assets
under management when valuing their practice, turning a “blind eye” to expense
management as a result, the report said. 

“If addressed early enough, many components that drive
practice valuation can be influenced in advance of a succession event,” the
firm said. “For example, if the weak point of a practice is its technology and
operating model, a migration to different infrastructure or to an outsourced
technology platform could be considered.”

Likewise, if an aging client base is the root issue,
an effort to win younger clients would boost the value of the practice.

Advisors with
less than 3 years until transition

During this period - existing risks, such as employee
retention post-transition and having a practice valuation completed by a
qualified consultant - should be addressed.

At this stage, there is still time to employ “streamlined
technology,” at which point attention should also turn to “tactical measures”
for implementing the chosen succession strategy.

“It is imperative that advisors focus on client
retention, regardless of where they may be in the succession planning process,”
the firm said. “Client retention is the top challenge for 22 per cent of
advisors that acquired an existing practice - well ahead of the financial side
of transactions, like obtaining deal financing.”

Practice owners should aim for a client retention rate
of 90 per cent or higher, by focusing on client satisfaction - both before and
after the succession event - with a strategy that safeguards continuity
relative to investment management, account access, reporting, product selection
and communications.

Other significant findings include that, while 40 per
cent of practice owners anticipate a succession event within the next 10 years, only one third of all practice owners actually have a plan in
place. Moreover, of those who do not have a succession plan, over half (54 per
cent) do not know the value of their practice.

“Advisors that plan ahead and focus on enhancing the
value of their practice today - with an emphasis on driving revenue up and
keeping costs down - will be best positioned to optimize the trade-off between
risk and return to achieve the best possible outcome when they are ready to
enact the succession processes they have in place,” Poer concluded.

The study is based on the results of a poll involving 227
practice owners and interviews with leading buyers of advisor practices,
brokers of practice sales, and consultants in the financial advisor
marketplace.