Succession planning is an important piece of practice management for independent advisors, and it is an issue many advisors are facing – or will be in the near future. Simple demographics of the United States and the American advisor community add credence to this statement. According to data from Cerulli Associates, there were 291,696 advisors in 2020; and more than 111,500 advisors are expected to retire through 20301. Alarmingly, however, recent industry observers have indicated a third to a half of these advisors still have no succession plan in place2.
If you are among the advisors who have yet to develop a formal succession plan, it is important to begin formulating your succession options and implementation strategies now. Our experience shows that advisors who have the greatest success in a smooth transition and ultimate exit from their practice are those who have defined and started implementing their succession plan at least two to five years before their retirement.
To begin the succession planning process, advisors should take a serious look at their ultimate retirement goals. Some of the first questions to be addressed are the timing of their final retirement, as well as considerations for a transitioning period. Then, the advisor needs to determine the form the succession plan will take. Historically, succession plans have only taken two forms: an External Sale or an Internal Sale.
External Sale for Succession
In an external sale, there is a clear date for ownership transfer to another individual or entity for a defined price and payment scheme. A sale to a similar-sized or smaller firm is seldom a good choice for capacity issues. Chiefly, would the acquiring practice have the personnel and platform necessary to significantly increase its advisory responsibilities? On the other hand, a sale to a larger firm can give the seller’s practice and clients access to expanded resources, operational support, and technology. The larger firm may also offer additional investment options and financial planning services, all of which can increase the client experience and ultimately benefit the advisor and his clients. Most sales include a contractual agreement for the seller to stay on for a stipulated period of time – generally a year or more – at no additional compensation to assist in the transitioning of clients to the new owners.
Internal Sale for Succession
Recent studies indicate that as many as 75% of advisors hope to follow the internal sale path for succession planning. However, only 25% of these advisors have actually identified who that successor will be. If there is an existing partner or a junior advisor within the practice, he or she would be an obvious choice to succeed the current advisor-owner. A family member with advisory experience could be another possibility. However, most advisors do not have these options available; the difficulty of finding a junior advisor to train as successor can be a time-consuming process and a non-ending source of frustration and dead ends. If an individual is found and trained, would he or she have the ability to manage a practice and service clients? Additionally, would the junior advisor have the financial capacity to buy the practice?
Third Option for Succession is Needed
As discussed, external and internal sales have historically been the only succession paths available to independent advisors. If a good match for an external sale can be found and negotiated to everyone’s satisfaction, or if a suitable junior advisor or family member is available and agrees to an internal sale, both options can provide a succession solution. However, the key in both methods is ‘IF’ these necessary ingredients in fact exist.
In addition, external and internal sales may not be the best solution for many advisors who want more flexibility and control. Keep in mind that both methods are definitive. The advisor’s exit date and transfer of practice ownership and control are fixed. Whether an internal or external sale, once a deal is formalized, there is generally no turning back. This is fine if the advisor is truly ready and willing to leave. However, the advisor may not be ready to completely retire and, therefore, not prepared to fix a pre-determined end-date when she or he must relinquish the business. Perhaps, the advisor simply wants to have more free time, or a reduced workload, and a gradual diminution of practice responsibilities as he prepares for exiting in a few years. Another consideration is that a fixed-date sale may provide an important one-time payment for the practice. However, it also may mean the loss of several additional years of the income the practice provides, which when added to the final sale price can considerably increase the total all-in compensation a retiring advisor receives.
Understanding these limitations and the drawbacks of both internal and external sales, a growing number of advisors are seeking other options for succession. These advisors want more flexibility and the power to incorporate specific personal needs and goals. They understand the importance of preparing a succession path but for varying reasons would prefer to have a gradual transition into retirement. They want the ability to adjust their final exit date – not a pre-determined fixed date that does not permit changes or tweaking. They know they need to establish a concrete Succession Plan but are simply not ready to cede full ownership and control. In sum, they understand the value of an alternative that allows them to design their own practice transition and seek a succession plan option that is adaptable and can be ‘custom-tailored’ to allow them to manage the transition steps and decide on the exact timing of their retirement.
Strategic Partnership for Succession
The good news is that an adaptable, advisor-controlled alternative does exist! Using a Strategic Partnership as a transition management and succession planning tool, advisors can design their own flexible, truly customized Succession Plan that prepares a smooth transition into retirement and allows them to decide all the steps and timing.
Strategic Partnership with Congress Wealth Management can provide an ideal succession solution. Strategic Partnership allows advisors to gradually prepare their practice and clients for their eventual retirement at a future date without having to give up control or ownership of the practice until they decide to leave. The final retirement date always remains entirely at the independent advisor’s sole discretion. However, when the advisor does decide it is time to retire, the practice and clients are prepared and aligned with the succession partner firm, creating a smooth succession that avoids the upset or worry often experienced by clients in succession changes.
In Strategic Partnership, select independent advisors establish a formal relationship with Congress Wealth Management, a $6 billion RIA with offices in Massachusetts, Connecticut, Maryland, Florida, Arizona, and California. For advisors seeking a successful succession, Congress Wealth has the capacity, reputation, and strength required to be the final acquiring firm when an advisor chooses to leave his/her practice – whether at a predetermined date, or in a general timeframe with the specific date being defined later by the advisor.
By design, the Strategic Partnership prepares a smooth transition of the advisor’s practice and clients, so everything is in place when the advisor’s final retirement date arrives. Ownership and control remain with the advisor until the advisor alone decides to retire. Until that time, the advisor fully retains the practice (w), clients, AUM, and revenues. However, the gradual transitioning of some investment management, as well as the operations and servicing, is occurring. Integration of reporting, billing, the client portal, and the technology platform can also be incorporated and proceed in a planned and deliberate design. During the process, Congress Wealth and its client servicing team are also becoming familiar with the retiring advisor’s practice and client needs. Nonetheless, the advisor always remains independent and has control of how and when the pieces of the plan are implemented.
Congress Wealth Advisor Solutions (CWAS) has been helping independent advisors plan their succession paths for over a decade. CWAS understands the need for a flexible succession solution that gives independent advisors more options in determining their personal succession plan. Strategic Partnership is uniquely suited for advisors who seek a well-planned succession solution that allows for the flexibility they want without being required to give up their control and ownership until they decide to do so.
If you would like to learn more about a Strategic Partnership and succession planning with Congress Wealth, please contact us. We are here to help.
1 Advisors Get Serious About Succession Planning Sam Del Row, Financialadvisoriq.com, March 17, 2022
2 Survey Reveals Details About Financial Advisor Succession Planning, SmartAsset March 9, 2022
Director Strategic Partnerships
Congress Wealth Management LLC (“Congress”) is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). For additional information, please visit our website at www.congresswealth.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Congress’ CRD #310873.
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