The Business Benefit to Succession Planning

Art by Alfonso de Anda

Late last year, the Financial Regulatory Authority came out with a 31-page regulatory notice highlighting the importance of succession planning among financial advisories.

While the notice refers to the aging demographics in the industry, it starts with a section on the benefits of succession planning no matter how close an advisory is to a transition. 

Philip Shaikun, vice president and associate general counsel at FINRA, says the organization emphasizes succession planning to protect both the industry and the end investors that advisers serve.

“There are a number of key benefits to succession planning,” Shaikun says, noting among them: minimizing operational risk, reducing regulatory risk, and keeping clients happy. “If firms have a good plan in place, that will inspire confidence in customers that the firm will maintain the same level of services, so from a competitive standpoint it benefits firms,” he says.

Succession planning can also mitigate legal and regulatory risk that could cost both time and money. This is especially true for smaller advisories as they “don’t always have additional staff that can step in,” Shaikun notes. 

FINRA does not want to imply that advisories are “in regulatory peril” for not having succession planning, Shaikun says, but advisories should be proactive to get the best outcomes for themselves and their clients.

Dressed for Success

Rob Madore, vice president at consulting firm MarshBerry Capital LLC, works with retirement and wealth advisories interested in selling. He says that for an acquirer to even consider such a transaction, the seller should have a plan in place for the future of their practice.

“A well-prepared business can tell the story about what makes them unique, why they’ve had such success, and back it up with readily available financials,” Madore says. “That is a firm that has the greatest optionality and leverage.”

Madore notes that, in what continues to be a strong acquisition environment, the price tags some owners may be dreaming of can be hard to land in reality, and particularly hard if you don’t have a longer-term plan for the firm.

“The elevated multiples that are so often floated in conversation really aren’t for those looking for an immediate exit from their firm,” Madore says. “Acquirers are looking to grow, and not just grow through the acquisition, but see the business grow organically after the acquisition – so they highly value a team who will stay with the business.”

Madore says acquirers are looking to bring advisers on that will be with the business at least three to five years, or more. When deals are structured, the acquiring firms tend to try and incentivize growth after-the-fact with strong earn-out components.

“In my experience, preparation and intentionality on the part of the seller have the greatest correlation with finding the best deal for you, your clients and your employees,” he says.

Joe DeNoyior, president of retirement and wealth management for aggregator Hub International, reiterates the importance of a strong team for advisories they are looking to acquire. An advisory with practice leads that are dedicated to the firm are preferred to Hub “helicoptering people in to take over the business,” he says.

“We don’t want to be somebody’s succession plan,” he says. “We don’t look to acquire firms by picking up margin and cutting head count—we want strong people.”

Even if an adviser is not looking to be acquired, it’s better to have their house in order for unexpected contingencies, according to FINRA’s Shaikun. He compares succession planning to estate planning—advisers may put it off because it doesn’t feel imminent, but if something unexpected happens, a contingency plan ensures a smooth transition.

“We tend to think about this kind of planning as not being discretionary,” he says. 

Next Gen

It’s not just independent firms that need to consider succession plans, however. Even large aggregators like Hub are starting to focus on the next generation of its advisers, according to DeNoiyer.

The aggregator is currently working on a program to cultivate the careers of its more junior team members, according to the retirement and wealth head. DeNoiyer says this work is in “early stages,” but that Hub’s insurance side already has good systems in place for his division to emulate.

“Where we are now in our in our cycle is being laser-focused on career pathing for these teams,” he says. “One of the reasons that we sold to Hub is, you know, is that I have a great team around me, but their career path was limited to where the adviser lead took the firm.”

No matter an advisory’s situation, however, Madore says the best positioned practices are those that don’t hold off on succession planning.

“The best time to start working on maturing the business, preparing for a financial event, or determining what options are available to your firm is when you don’t have to,” he says. “Time is the greatest killer of deals. The more work you do up front, the less chance of issues in the later stages [of a deal.]”