Though not by much, estimates pertaining to advisor retirement in the coming years vary, but is reasonable to expect that over the next decade, more than 30% though less than 40% will gradually step back or retire outright.
Call it 35% and it’s still a sizable, potentially disconcerting percentage when accounting for the wealth management industry’s low replacement ratio. Said another way, there aren’t enough young people choosing financial advice as a career and many of those that do, don’t make it past the first couple of years in the field.
Those trends speak to the importance of succession planning and also highlight why many advisors opt for internal succession. An easy-to-understand concept, internal succession is applicable across myriad industries. It’s simply the act of grooming current staff to takeover key leadership spots in anticipation of the current occupants retiring.
Internal succession is highly pertinent in the advisory business because many client opt to stay with an advisor due to personal connection and trust. Those are valid reasons to be sure, but they also imply that if a practice is sold to a third party, there’s a risk of client attrition – one that can potentially be avoided by readying current staff to take the lead when founders retire.
Getting Internal Succession Right
Internal succession shares something in common with advisors’ client-facing duties: planning matters and can make all the difference. Add to that, succession planning is akin to say retirement planning in that the earlier is truly is the better.
“Internal succession requires a longer runway — up to 10 years before your planned exit. It’s also wise to consider more than one viable option,” notes Brie Williams, global head of advisory solutions and wealth intelligence at State Street Global Advisors (SSAG). “Planning early allows you the time to source, develop, and mentor young advisor talent and to consider financing options. When assessing successors, start with the end in mind.”
Getting an early jump on internal succession leads into Willams’ second execution tip, which is not letting prospective internal buyers’ lack of capital be a dealbreaker. Over time those would-be buyers can accumulate the capital necessary to acquire the practice. Plus, there’s always longer-term financing or earn-out provisions that can expedite the process. That is to say it pays to be flexible and allow an internal succession plan room to evolve.
“Once clear on your transition needs, focus on talent acquisition,” adds Williams. “Many advisors discover they need to change course along the way, realizing that their first choice for an internal successor isn’t the best choice in the long-term.”
Other Important Points
It’s up to the individual advisor to decide if internal succession is easier than a sale to a third party, but there ways to smooth out the former. One of those tips is upon identifying credible successors, getting those advisors involved with client interaction and meetings.
That simple step can prove efficacious when it comes to post-transition client retention and by bringing in younger advisors into meetings with current clients, it’s possible the younger heirs of those clients will keep their business with the firm when the time comes to make that decision.
“A smooth transition isn't just about practice ownership — it's about client confidence. Clients want to know their service experience and investment strategy will remain consistent,” concludes Williams. “Be transparent, involve your successor(s) early, and give clients opportunities to build trust and rapport through shared meetings, planning sessions, and collaborative communications.”
Related: Buffett, Berkshire and Dividends. This ETF Has ‘Em.