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By some estimates, approximately 10,000 baby boomers retire every day – a statistic that likely doesn’t surprise advisors. After all, advisors are front-and-center in the retirement planning/readiness equation and data suggest boomers are more likely to be working with advisors than younger demographics.
But what about advisors themselves? Many are boomers and eyeing retirement. That means that while advisor are busy helping clients plan for and enjoy retirement, they’re on the clock when it comes to succession planning. Even those advisors that enjoy the work and the day-to-day interactions with clients need to realize that a day will come when they either can’t or simply don’t want to work anymore.
There’s nothing wrong with that. It’s just how life goes. Either way, succession planning is vital and that’s the case whether the advisor is thinking of selling the practice or has an eye toward internal succession. Both scenarios have variables principles need to be mindful of.
Some advisors want to take a different approach, embracing a true succession model. There’s nothing wrong with that, either. It’s admirable and makes a lot of sense if the practice already has the right people in place. That’s easier said than done and traditional succession is becoming more difficult because fewer people are entering business.
Investigating Internal Succession
Internal succession is what the phrase implies – someone that’s already in the firm will take over for the principle(s) when that person or people retire. Internal succession has its advantages.
“When comparing internal succession to a direct sale, merger, or acquisition, internal succession often results in a higher degree of continuity for clients and staff,” notes Brie Williams of State Street Global Advisors (SSAG). “It also offers the advisory owner the flexibility to either fully retire or maintain a limited role.”
For the advisor nearing retirement, there are clear benefits to internal succession. However, it’s not a free lunch. The principle that’s considering leaving or significantly scaling back their workload has to be taking the steps necessary to set the successor up for success. Then there’s the human element/wildcard of how to handle potentially negative emotions from an employee that feels as though they were passed over in the succession process. Translation: internal succession requires some dedication and work.
“Failure to effectively identify and develop a successor could result in a less-than-suitable match, putting client relationships, the future prosperity of the business, and the your own transition plans at risk,” adds Williams. “To orchestrate a successful handover, it’s important to understand what it takes to effectively develop an internal successor and what a potential timeline for internal succession might look like.”
Internal Succession not For Everyone
Over the next decade, 41.5% of all assets currently found in the wealth management industry are expected to change hands. It’s a matter of how those changes occur. As SSGA’s Williams points out, “44.6% of advisors plan to sell or transition their business to a partner, junior advisor, or family member upon retirement.”
That means a majority of advisors are NOT considering internal succession. There are a variety of reasons for that gap. Some principles simply believe the appropriate successor isn’t already on staff or in the family and that finding that person isn’t worth the effort. Others may have a person in mind, but that prospective heir doesn’t have the capital needed to buy the practice.
The point is advisors should be proactive in succession planning and realize that if the best outcome is to be achieved, this could be a multi-year process that requires flexibility.
“A successful transition requires advisory owners to willingly relinquish control and emotionally prepare. In other words, they must overcome ‘Founder’s Syndrome,’ or the challenges entrepreneurs can face in moving on from their business due to fear, issues of control, decision-making, and emotional attachment to the business they created,” concludes Williams. “That said, the lead-up to retirement can also be an exciting time for advisory owners, especially when preparing to transition your business to a trusted internal successor.”
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