Advisors Need 10 Years To Implement Succession Strategy - New Research

Eliane Chavagnon

16 May 2012

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.