It seems strangely ironic – but the same educated, well-meaning and thoughtful advisors who readily provide guidance to business clients on succession planning rarely do it for themselves.
In a similar case of “the shoemaker’s children go barefoot,” about half of advisors have no transition or succession plan, estimated George Hartman, author, coach and consultant at Toronto-based Market Logics Inc.
“Are we succeeding at succession? I would say the answer is no,” Hartman told a recent meeting of the Canadian Association of Independent Life Brokerage Agencies (CAILBA.) “This is a huge issue in the industry [and] I don’t think we’re doing a really good job at it.”
In fact, says Hartman, clients end up with better succession planning than the advisors who counsel them. About 44% of clients have a written plan, another 44% have at least talked about it and only 12% don’t have a plan at all.
“The advisor community is completely upside down,” said Hartman, who has conducted extensive research on succession planning. He said 52% of financial advisors don’t have a plan at all, 38% are thinking about it and only 10% actually have a plan that outlines who will take over, when and how.
Constantly forgoing the creation of a succession strategy can interfere with advisors’ chances of reaping the kinds of financial and emotional rewards they imagine after decades of work. If an advisor cannot suddenly work, it can upset clients who may be left without a financial advisor they know and like. On top of that, managing general agencies (MGAs) and insurers may be out millions of dollars since they depend on advisors and their ongoing servicing of clients for their revenues.
“I’m very concerned about the industry and what might happen if they do not have a vibrant distribution force out there to serve the public,” said Hartman. “We will see it taken over by a different method of distribution, a different level of service to consumers and I would say a much-depleted level of confidence in some of the products and services consumers should be considering seriously.”
So what’s the hold up with advisors? Many simply don’t want to plan for succession, Nancy Allan, executive director at the Independent Financial Brokers of Canada (IFB) told the CAILBA meeting.
“I guess they’re counting on the lottery like everyone else,” said Allan, noting that more than half of her members have no specific succession plan.
Advocis members are no different. In a member survey conducted at the end of 2015, 24% of those who responded said they plan to sell their practices and fully retire; another 9% were looking for a successor and 44% said they will put a succession plan in place once they get closer to retirement.
While the numbers are not definitive, 54% said if they were unable to work they would put a “contingency” plan into place; 16% said they assume a partner would take over; 15% said they don’t have a plan and hope nothing happens to them, while another 12% said where applicable, the manufacturer would be responsible for reassigning their clients.
It’s hard to let go
Allan said many advisors simply don’t want to stop working. Financial advice is a relationship-based business and most advisors have a hard time letting go.
For some advisors, succession means the end of their career, rather than the beginning of the rest of their lives, said Hartman. Succession, he said, is not an event, but a process that can take five or more years to complete – not the two or three years most advisors estimate. And it’s not easy to find a successor and integrate that person into a well-established practice where clients are used to dealing with a particular person and a particular style.
Hartman outlined a six-point plan for advisors to put together a successful succession plan.
1. Prepare financially for your future: Like your clients, figure out what you want to do in retirement and whether you can realistically meet those goals. “An advisor who makes $200,000 or $300,000 a year somehow thinks that when they walk out the door they are going to continue to maintain that lifestyle. But how are they going to do that unless they have accumulated several million dollars in assets?” Also, get a professional practice evaluation to find out what the practice is really worth.
2. Prepare emotionally: Listen to other advisors and why they are having a hard time leaving their jobs. Many advisors simply miss the interaction with other people, enjoy going to events and have established a public profile that they fear they will lose when they sell the business. Maybe it’s time advisors take their knowledge and become a mentor or a coach, suggested Hartman.
3. Determine an exit date: It’s important, said Hartman, to put a stake into the ground to give you a frame of reference.
4. Select the best exit plan: The most popular exit plan is what’s known as a partial exit – the advisor slows down and keeps a small portion of his book, dividing the rest up with associates or selling it. Hartman says an internal transfer is the best option because it leaves the book to another advisor in the same organization, making it the least disruptive. A third option, which he deemed the most disruptive, would be to transition the book to another advisor at another firm.
5. Put it in writing: Make sure you have a professional look over the decision before signing.
6. Implement the plan.
Allan said her organization has expanded its focus on succession planning away from just older advisors. All its members, she said, should be prepared for whatever happens.
IFB has developed a program called “What’s coming up next?” It provides an online self-assessment tool helping advisors determine where they would they like to be in the future and focusing more on helping financial advisors prepare emotionally for an exit rather than the transaction itself.
It also offers members a 20-minute questionnaire after which advisors receive a report with suggestions on next steps and whether they should consider taking their business decision to an accountant and lawyer. Advisors just starting out can use the report as a benchmark going forward, said Allan.
“It’s planning for the future and something you need to do as part of your day-to-day practice management,” she said.