Special Feature

Passing the torch

This three-part series explores the succession planning process for financial advisors. Part one addresses the importance of planning ahead and the risks of procrastinating. Part two outlines different types of succession plans, and part three examines communication strategies. Gain more insight into the advantages of succession planning in a video featuring Julie Littlechild, president of Advisor Impact Inc.

Practice Management

When handing over the reins to your advisory business, you need to ensure there will be consistency to the services clients receive

By Rudy Mezzetta |

When identifying a successor for their businesses, advisors have many options from which to choose: bringing in a partner and eventual successor; mentoring an associate; passing down the business to a child or other family member; or selling to an established advisor outside of the practice. But whichever option they choose, it will be a decision they must consider carefully, advisory business consultants say.

"It's something that's so meaningful to advisors — ensuring that there is some consistency to the services their clients receive over time," says Julie Littlechild, president of Advisor Impact Inc. in Toronto. "Unless all your clients are planning on retiring on the same day as you do, which seems to be somewhat unlikely, you're going to want to put a good plan in place."

Each strategy for choosing a successor has its pluses and minuses, the consultants say, and an advisor's decision of which he or she chooses will have much to do with personal preference.

"Some factors in making a decision are just personal in nature, such as ‘I want to bring a child into the business'," she says. "That, in and of itself, will define your strategy."

The advantage of bringing a child or family member into the business is that it can be reassuring to clients who view the family member successor as evidence of continuity in the business. However, it is important that both clients and staff know that the family member is being mentored properly and will be taking over because he or she is ready — not just because he or she is related to the advisor.

"You don't only have a business relationship with the successor, you have a personal one," says Joanne Ferguson, co-founder and president of Advisor Pathways Inc. in Toronto. "I think it needs to be clear: You need to let your team know why you think this family member is the best person for the job."

Many advisors prefer choosing a junior associate as a potential successor, which gives the advisor time to identify and mentor a good candidate and introduce him or her to clients over a longer period of time.

There are currently many younger advisors looking to join existing businesses, rather than starting their own, experts say.

"I think the reality is the success rate of new people in the business, which has never been high, has dropped, as clients have become more discerning," says Dan Richards, CEO of Clientinsights in Toronto. "You have more qualified people wanting to be associates, and you've got advisors who are running bigger businesses who can support more infrastructure, more people."

One of the downsides of choosing a junior as a successor is that the associate may have difficulty obtaining the funding to buy the business, Littlechild suggests: "If funding is not available, then you may have to find some sort of long-term solution, such that the associate can earn equity over time."

Selling the business to an outside advisor is always an option, but the key to the success of that strategy is finding the right person for the business and making sure the transition is handled very carefully.

"Clients tend to be risk averse," Richards says. "They develop a comfort zone working with an advisor. If all of sudden there's somebody new, and particularly if clients are older, that can be something of a challenge."

It's also possible for an advisor to bring a partner into the business — particularly if the new advisor has a complementary business approach and set of values — with a view to having him or her buy out the business down the line. This means a smoother, less abrupt transition from the perspective of the clients.

This is the second installment in a three-part series on succession planning. On Wednesday: Communicating during the transition process.