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

Advisors should begin succession planning at least three to seven years in advance, experts say

By Rudy Mezzetta |

Advisors who fail to plan properly for the eventual succession of their businesses are unnecessarily taking on several key risks, not the least of which is that the selling value of their book could fall short of expectations when the time comes to retire.

Despite the pitfalls, however, many advisors are failing to put a plan into place well before their intended retirement date, experts say.

"There are a substantial number of advisors who aren't thinking about succession early enough," says Julie Littlechild, president of Advisor Impact Inc. in Toronto. "And the risk, of course, is that the value that they're expecting from their business simply won't accrue."

There are many reasons that advisors choose not to plan for retirement, starting with the impulse to put off future concerns, especially when there are more pressing issues to deal with.

"Succession doesn't feel like a real issue until advisors get closer to retirement," Littlechild says.

Other advisors may be looking to avoid the tricky question of choosing a successor, or simply believe that they are the ones who are best suited to serve their clients' needs properly.

"The most common succession plan is, ‘I'm going to work until I drop'," says Dan Richards, CEO of Clientinsights in Toronto. "And I think part of that is that advisors tend to enjoy what they do, it's a business that lends itself to autonomy, and there are instances of advisors working into the seventies or eighties."

However, experts suggest that a proper succession plan requires anywhere from three years to seven years to implement properly, depending on the plan. There needs to be enough time to find a suitable successor; to groom the successor, in cases where he or she is an associate or a junior; and to gradually introduce that successor to clients, with the successor taking on increasing responsibility as the plan develops.

A proper succession plan helps clients feel better about the transition from the retiring advisor to the successor. That will help boost the value of the business. On the other hand, a poorly planned handover may have some clients asking themselves if they wouldn't be better off somewhere else, which could make the business less valuable.

Apart from the benefit of boosting the value of the business, a good succession plan allows a retiring advisor to do right by his or her clients and staff.

"Most business owners have pride in the business that they've built, and they want it to live on after they do," Richards says. "They want their clients to be well served, and they want to ensure that their staff is well taken care of."

Finally, having a good succession plan in place is essential to the continued health of the business in cases where the advisor has a health emergency, or unexpectedly dies.

"You'll have something untoward happen, and then all of sudden there is a huge friction between the heirs, who begin fighting over the value of the biggest asset in the estate – the business – and how to deal with it," Richards says. "That's why you need a succession plan in place: so if something unexpectedly happens, you don't have discord among family members around what happens to that business."

This is the first segment in a three-part series on succession planning. Tomorrow: Different types of succession plans.