A Mere 27% of Advisers Have a Formal Succession Plan

Less than one in three, 27%, of financial advisers have a formal succession plan, according to a new report, “The Succession Challenge 2018,” issued by the Financial Planning Association (FPA) and Janus Henderson Investors. Forty-one percent have some sort of succession plan.

For those within five years of retirement, 40% have a formal succession plan, but for those within five to 10 years of retirement, the figure drops to 34%.

Advisers in larger practices are more likely to have a formal plan, with 60% of advisers in firms with $500 million or more in assets under administration (AUA) having one. Among firms with less than $50 million, a mere 13% have one. Succession planning also tends to focus more on the value of the business than the transition of the business, with 72% saying their plan includes a goal for the value of the business. Sixty-one percent have a plan that includes information on the client transition process, 57% with information on the workload transition process, 56% with information on the timeframe for the transfer process, and 41% with information on the team transition process.

However, for advisers in practices with 10 or more team members, 67% have formal succession plans that include information on the team transition process. For those with fewer employees, this is true for only 47% of advisers. Among those with a formal plan, 39% worked with an outside consultant to create it, and 18% worked with someone in the broader organization, i.e. their broker/dealer (B/D).

Only 28% of advisers say they feel very prepared to transition the business. For those in larger organizations, this is true for 89% of advisers.

Among those advisers without a succession plan, 44% say their practice faces significant risk, and another 41% see some risk. Forty-nine percent of advisers without a succession plan say finding a successor has been a challenge, followed by finding a successor who can fund the purchase (29%) and knowing what to put in the plan (29%).

Ninety-seven percent of advisers without a plan say they will create one. Among team members, 16% say they do not know when the adviser they work for will retire, and another 11% say they do not think the adviser will ever retire. Ninety-six percent of team members say that not having a plan is a risk, and 88% say that a transition will have a significant impact on them. Among all advisers, only 11% say they are clear on when they will retire, and only 29% are somewhat clear. For advisers who have a succession plan, 22% are clear on when they will retire and 35% are someone clear. This drops to 4% and 21%, respectively, for those advisers without a plan.

When it comes to valuing and transitioning the business, 61% of advisers have a goal for the value, and 48% used a recurring revenue multiple to calculate that goal. Sixty percent of advisers say they are on track to meet that goal; another 15% say they are ahead of meeting that goal. Nine percent say they will sell the business to a senior adviser on the team, and 28% say to a junior adviser.

In conclusion, the authors of the report say, “Advisers need to invest time and effort in mapping  out a plan to transition their business. The white papers that will be developed based on this research will provide actionable steps to make that happen.”