Planning for a Succession? NFP Study Explores Maximizing Practice Value

“Advisers who plan ahead and focus on enhancing the value of their practice—with an emphasis on driving revenue up and keeping costs down—will be best positioned to optimize the trade-off between risk and return to achieve the best possible outcome,” said James Poer, president of NFP Advisor Services Group.

Nearly 70% of practice owners believe a successful transition will take five years or less to implement from the time a succession strategy is chosen to the time they can leave the practice, the study found. Merger and acquisitions (M&A) consultants, however, suggest 10 years before a planned transition as the optimum time it will take to maximize the value of the practice.

Since many advisers do not have a full 10 years to plan a practice succession, the study suggests three steps to improve the value of a practice and effectively plan a succession.

Advisers with three or more years before a transition can enhance the valuation of their practice. Advisers typically think in terms of revenue or assets under management, and often turn a blind eye to expense management. Practice buyers and M&A firms, on the other hand, use normalized earnings to value a practice based on its profitability. If this is addressed early enough, many components that drive practice valuation can be influenced in advance of a succession event. If the weak point of a practice is its technology and operating model, consider migrating to a different infrastructure or to an outsourced technology platform. If an aging client base is the issue, make a concerted effort to win younger clients.

Advisers with fewer than three years until practice transition should focus on mitigating existing risks. The focus of the last three years before a transition is enacted should address existing risks, such as employee retention post-transition and having a practice valuation completed by a qualified consultant. There is also time to implement streamlined technology that will be turn-key for the buyer. At that point, much attention should be on tactical measures for implementing the chosen succession strategy.

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It is imperative that advisers focus on client retention, regardless of where they may be in the planning process. Client retention is the top challenge for 22% of advisers that acquired an existing practice, well ahead of the financial side of transactions, such as obtaining deal financing. Accordingly, practice owners should aim for a client retention rate of 90% or higher by concentrating on client satisfaction both before and after the succession event, with a strategy in place that provides clients continuity for investment management, account access, reporting, product selection and communication.

The study also reveals that while a staggering 40% of practice owners anticipate a succession event within the next 10 years, only one-third of all practice owners have a plan in place. Moreover, among the two-thirds of those practice owners without a succession plan, 54% do not know the value of their practice.

 “Succession planning is an important aspect of the wealth management industry, particularly at a time when one in ten financial advisers is over 60 years old,” Poer said. “Just as advisers utilize the efficient frontier to help maximize investment outcomes for their clients by optimizing the balance of risk and return to fit a client’s time horizon, it is critical that they apply similar thinking to help maximize the results of their own eventual practice succession.”

“The Efficient Frontier of Succession: Maximizing Practice Value,” commissioned by NFP Advisor Services Group and produced in March by the independent research firm Aite Group, is based on a survey of 227 practice owners and interviews with buyers of adviser practices, brokers of practice sales and consultants in the adviser marketplace.

The study can be requested here.