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It’s Time RIAs Got Serious About Succession Planning

Advisors help clients manage their finances, yet one in four have no succession plan. Enough of “do as I say, not as I do.”

Registered Investment Advisors oversee their clients’ financial health, yet surprisingly 26% of RIAs have not developed their own succession plans, according to a recent study by financial research firm Cerulli Associates.

“Even though many understand their importance, they don’t know where the starting point is,” explains Marina Shtyrkov, a Boston, Mass.-based research analyst at Cerulli. Solo practitioners receive “less firm-driven succession planning support,” she notes.  Many of the larger firms encourage staff to draft structured succession plans that address the problem and create alternative coverage within the office, she adds.

Solo practitioners, particularly in remote zip codes and outside of metropolitan areas, can struggle to identify fellow RIAs who share their values, embrace similar financial tactics, and are simpatico with the way they treat their clients. In short, they are looking for “someone who they think will care for their client’s financial life with the same care they do,” Shtyrkov says.

But the study also cited that the average age of financial advisors is 52-years-old, which creates a more urgent imperative to act sooner rather than later.  Most advisors have an aging client base that is drawing down assets and therefore “the value of your book will start to decline,” Shtyrkov notes.

Given that 40% of advisors are expected to retire in the next 10 years, “a seller’s market will turn into a buyer’s market,” she cautioned.  The glut of financial practices saturating the market will shrink their value.

Inhibiting the drive to develop succession plans is the fact that many registered investment advisors work into their seventies and aren’t contemplating early retirement, notes Geoffrey Brown, the Chicago, Ill.-based CEO of the National Association of Personal Financial Advisors (NAPFA). Many advisors, he adds, “aren’t in touch with their own mortality” and fail to give succession planning the forethought it warrants.

Moreover, many advisors carve out informal succession agreements with colleagues in their town, who can take over for them in case of disability or death.  While the informal arrangement isn’t a substitute for well-thought out written plans, it operates as a de facto agreement, Brown suggested.

If the advisor were to die or become incapacitated through dementia or disability, the client is left in limbo, Brown noted. “How do I gain access to my assets, my financial plan, and how do I go about finding a replacement?” are the questions that clients are forced to grapple with.

The advisors that operate with blinders on, fail to address succession planning, or are in denial about retirement or their own mortality are being negligent of their fiduciary duties.  “It’s always good to plan for the unexpected.  Life is unexpected,” Shtyrkov stated. 

One way to solve the succession planning issue is to sell one’s firm to a larger wealth advisory office, noted Kevin Corbett, managing director of Overland Park, Kansas-based Mariner Wealth Advisors, which oversees $24 billion in assets under management. It has expanded, mostly through acquisition, in 13 years from a firm that once managed $350 million.

The clients of a sole practitioner who sells out to Mariner Wealth Advisors become Mariner’s customers.  “If that sole practitioner is hit by a bus tomorrow, his clients are allocated to another Mariner Wealth Advisor, ideally allocated within the same office,” Corbett said.

Corbett finds it ironic that RIAs spend their lives advising owners of small businesses to consider the valuation of their business when closing in on retirement. But many of these advisors don’t pay considerable attention to the valuation of their own practices.  “It’s the plumber who has leaky pipes in his house,” Corbett quipped.

The issue of succession plans for RIAs is so critical that NAPFA’s Brown would like to see the SEC seize the initiative and make it a requirement.  Though he’s not a compliance expert, he said, “There’s no formal rule as I understand it, but I’d like to see federal and state regulations instituted that extend succession planning as one of their fiduciary duties,” he said.

Advisors constantly tell their clients that “having a roadmap for the future will give them peace of mind,” Shtyrkov reminded us. That message holds true for RIAs too.  Having a formal succession plan in place reinforces that their “practice and clients will be considered, and their own financial future will be taken care of,” she said.

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