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Want a Succession Plan? Get Out of Your Own Way

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  • Inaction on the succession front has emotional roots.
  • As a result, firm owners ask too much of would-be successors.
  • Stop trying to be immortal.

A lot of ink has been ladled over succession planning for independent wealth-firm owners, and rightfully so. Many advisors lack plans for the day they can’t look after their clients anymore arguably goes against the fiduciary standard some of them work under. And, no less important, this inertia could deprive them of money they might get from such a sale.

But before we offer solutions, let’s take a closer look at the problem from viewpoint that succession is a stumbling block because it’s so personal.

It’s a notorious statistic. Two thirds of retail-oriented RIAs envision selling to internal successors — these firms’ preferred approach to next-generation continuity — but only a quarter have particular successors in mind, Fidelity Investments says in a groundbreaking study. Worse, only 40% of these senior advisors had signed-and-sealed succession plans in hand.

Meanwhile there’s no shortage of help for would-be succession planners. Besides “value add” consulting on the topic from custodians, asset managers and other vendors, there’s an army of consultants, dealmakers and rollup artists with a variety of approaches to making things happen on the succession front.

So why doesn’t more rubber hit the road?

Fidelity says it’s because most succession work is done by or for “high-performing” firms — outfits that are significantly more productive, profitable and growth-oriented than others, and more willing to put time, thought and money into their succession needs. It’s these firms too that are involved, both as sellers and buyers, in much of M&A activity in the RIA space these days.

If what’s holding many advisors back from real succession planning really is simply a lack of intestinal fortitude, then well and good. Firm owners should get more aggressive and put succession planning high on their newly dynamic to-do lists.

But what if it isn’t so easy? What if indie advisors who can’t get their succession acts together aren’t just feckless, and there’s something else behind the widespread inaction?

What if — as some of my conversations with RIA and independent brokerage-practice owners over the last 15 years suggest — the apparent inattention to succession planning comes down to the fact it’s initially sobering and ultimately heartbreaking.

Right off the top, planning to hand over your business in an intergenerational transfer amounts to looking Death in the face, which takes guts to do over a sustained period.

Then, to the extent we can ever push mortality aside, laying the groundwork for succession can be a distractive, furtive and all-consuming endeavor.

For advice-firm owners with their succession antenna out, it’s hard to contemplate a non-support-staff hire, meet advisors at conferences and other gatherings, or simply hear of a younger FA’s existence, without running that person through a sort of mental succession filter.

Is she bright, eager and personable enough? Does she have sufficient experience and training? Is she in the right part of the country or at least amenable to relocation? Could she take your firm into the next generation and, in a fair exchange, give you the time and some of the funding you need to tackle retirement on your terms?

Firm owners’ experiences bear out the impression these requirements make for a very tall ask. Still, they try — and more often than most care admit.

Far short of actual hires, let alone open explorations of succession issues with junior colleagues, firm owners enter into email correspondences and LinkedIn chats with a view, however foggy, of identifying, teasing out and confirming the existence of next-gen leaders for their practices.

And, as firm heads have been telling me for years, most of this grueling work comes to nothing.

I know an extremely personable advisor in his late sixties, a clear leader in his market, who has gone through three succession candidates in less than 10 years — and one of them cycled through the process twice only to bow out both times. The reasons varied — one young candidate wanted to teach, another decided she was happiest in the background — but for outcome was identical for the owner, who now, against all instinct, is forced to contemplate an external sale.

Meanwhile there’s more potential for chagrin among successor seekers when they fail to grapple with another point. When they get honest about the issue, firm owners will admit they’re in search not just of successors, but of clones — candidates who show every sign of meeting each challenge and seizing on each opportunity just they would.

That’s of course irrational, and, as a direct consequence, it’s an invitation to profound disappointment.

Put it another way. If it’s true that failure to lock in a succession plan that’s fair, workable and broadly in your clients’ best interests comes down to the fact it’s hard to replicate yourself, no wonder only about 25% of RIA owners have such plans in place.

So, what can you do?

You can start by understand the options available to you include simply turning the lights out at your firm when it’s time to retire. You can lock in a low-hurdle, rescindable agreement to sell your book to an RIA aggregator to ensure if not continuity then at least continuance for your clients — and of course it’s best to make those plans clear.

If you chose an internal succession strategy, understand

  1. It’s not about you, and
  2. Things will change

It’s not about you because — unless medical-tech breakthroughs let you strap yourself into an eight-foot Teflon exoskeleton and come lumbering into work every morning — you won’t be around. Whether you’re off sipping Mai Tais for pushing up daisies, what goes on at the firm you started isn’t your business anymore.

As for change, your big worry should be that it doesn’t take place. Any successor worth her salt will change things up to meet the demands of the marketplace. Do you run your business precisely as an advisor — make that “broker” or maybe “capital manager” — did in the 1970s?

You know you don’t.

So come to terms with the fact that the biggest barrier between you and sound succession planning is your instinct to micro-manage.

Once you get over yourself and your oh-so-unique situation, you can start putting your succession plan in place from an array of resources and the advice of experts.

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