A majority of financial advisors, many of whom preach the value of succession plans to clients, do not have plans themselves, according to the 2009 Advisor Survey, sponsored by Lévis, Que.-based Desjardins Financial Security in partnership with Investment Executive.

Out of the 920 advisors interviewed for the survey, 76% say they do not have a formal, written succession plan. The survey was conducted by Surveys, Opinion Polls and Marketing, a market research firm based in Quebec City.

“It’s a classic case of the shoemaker’s children,” says George Hartman, president and CEO of Toronto-based Market Logics Inc., an advisor consulting firm. “The longer an advisor has [his or her] practice, the more time it takes to manage the business. The strategic issues take second place to operational and tactical issues.”

A succession plan typically includes the advisor’s vision of what his or her retirement lifestyle will look like, who will be taking over the business, the practices and standards the successor will need to follow for a solid transition and the value of the book of assets.

The average age of survey respondents was 50. Among survey respondents 65 and older, 67.8% said they did not have a formal written succession plan, says Michele Bourdeau, senior advisor, marketing research, with Desjardins. And roughly 72% of survey respondents between the ages of 55 and 64 also had no plan in place.

Without a succession plan in place at least two to three years in advance of the advisor’s anticipated retirement age, Hartman says, the advisor risks not getting the maximum value for his or her book of business when the decision to sell is made.

“When you have to sell anything in a hurry, you don’t get the best price,” says Hartman. “You will be scrambling to find the right successor and you could miss the right transition steps.”

Those steps, he says, include evaluating your client relationships and internal processes to ensure they get passed on smoothly.

Advisors who get the most value for their businesses, he adds, often begin succession planning as early as 10 years in advance of retirement.

Waiting too long to create a succession plan also puts advisors’ businesses at risk of being devalued because of unexpected events — such as an accident or death — that occur close to retirement age, adds Al Roissl, managing director of a Desjardins Independent Network office in Toronto.

But the fact is that most advisors don’t start to think about succession planning until they get close to retirement, says Dan Richards, president of Toronto-based ClientInsights.

According to the Desjardins/IE survey, 85% of advisors expect to retire when they are 60 or older, and the majority pick age 64 as their desired retirement age. Given Hartman’s view that most succession planning is often best started 10 years before actual retirement, that suggests succession planning for many advisors should begin as early as age 50.

Part of the difficulty some advi-sors have with succession planning is that it demands they contemplate how the market values their life’s work, says Julie Littlechild, president of Advisor Impact Inc. of Toronto: “[Advisors are afraid of] asking the tough questions about what the market value of their business is and if they will achieve that number [that’s] in their head. You can be blissfully happy and ignorant if you don’t dig in and determine what that is.”

In fact, some advisors’ overconfidence about how much their books of business will be worth when they retire may lead them to procrastinate in creating a formal succession plan.

“There’s this optimism that when I’m ready to retire, someone is going to swoop in and buy my book using the top line of what it’s worth,” says Littlechild.

And in past years, this expectation may not have been too far off the mark. When markets were strong, buyers of advisors’ books far outweighed vendors in the industry, says Richards, which resulted in vendors having the pricing power: “[There were] 10 times the people looking to buy a business than there [were] selling a business.”

Advisors didn’t need to worry so much about succession planning, he adds, because buyers were thick on the ground and the vendors were confident they would get top dollar for their business.

@page_break@However, with the recession lingering, Littlechild suspects it’s going to get more difficult for advi-sors to get the top-line values they want: “Pressure [will] come from buyers who are beginning to demand more documentation around staffing, client relationships and processes.”

This means advisors selling books need to have a clearly defined succession plan to get the price they want.

As Roissl notes, the problem in not getting a sufficiently high value for a book is that the advi-sor’s lifestyle in retirement could suffer. He suggests that in today’s market, many advisors are disappointed in the market value of their books, leading them to shelve thoughts of both succession planning and retirement.

For example, an advisor making $300,000 a year in income from his or her book, says Roissl, may only be able to sell the book at a value that generates a retirement income of $80,000 a year. “That’s a big cut in pay,” he says. “[The vendors] need to get a lot of capital to generate the yearly income they are used to.”

Something else that gets in the way of starting to develop a succession plan is the prospect of a time-consuming search to find the right successor, adds Roissl. About 8% of survey respondents cited the lack of a suitable successor as the biggest roadblock to retirement.

“I’m not going to sell my book today to just another 40- or 50-year-old in the business,” says Roissl, who adds that it’s getting more difficult for aging advisors to find younger successors. More regulation and paperwork are making it tougher for younger people to break into and stick with the business.

Littlechild says advisors need to stop thinking about succession planning only as a formal way to document their exit from the business: “We need to change our definition of what a succession plan is. Understanding very simple things, such as how we plan to exit the business, is going to help us understand how we have to run our practice today.”

For example, if an advisor is going to sell his or her book to an outside firm, vs selling it to a family member at retirement, Littlechild says, that could affect how the advisor runs the business in the decade or so before the advisor hits retirement.

Meanwhile, many advisors who have succession plans intend to have the transition occur over several years. Some advisors plan to phase out of the business, says Roissl, and continue serving the clients or areas of their business they were most happy with.

The Desjardins/IE survey shows that 67% of advisors with a succession plan say the transition period will be more than one year long. IE