Succession Planning: Things to Consider When Passing the Torch

by Kate Stephany

I bet you thought this was going to be an article on sponsor succession. Wrong.

Yes, FINRA requires its members to know with whom they are doing business. Many RIAs also take steps to do this as part of their fiduciary duty. As part of getting to know a sponsor, the topic of succession will be discussed and analyzed, both at the ownership and executive management levels. Succession is very important as many alternative investments are held or managed for at least five years, often times longer. Broker dealers and RIAs look to a sponsor’s succession planning to assess how a sponsor is working to mitigate any potential business interruptions due to a planned, or unfortunately unplanned, departure or transition. Many broker dealers and RIAs know through experience that if a sponsor hasn’t contemplated succession, it hasn’t contemplated how it will work to stick around in the industry.

Are You Falling Short?

However, have you, dear broker dealer and RIA blog reader, looked at your own succession planning? If you are in the majority of advisory firms, you haven’t. According to the Financial Planning Association’s (FPA) 2018 survey, only 27% of advisory firms have a formal succession plan, up a scant 2% from its 2015 survey. What is alarming is that according to Blue Ocean Global Wealth, in 2013 (reflecting the most recent we could find), 41% of independent advisors were over the age of 50, and another 29% were between 40 and 50 years old. Therefore, by 2023, it appears that the majority of advisors could be over 50 years old.

Questions to Ask Yourself

Many new potential investor clients are widows, or are millennials (or younger). Most likely these clients have either just gone through a personal "succession event" related to a spouse or parent, and/or are looking for an advisory relationship that will evolve as their lives grow to include marriage, home ownership, children, and retirement. Moreover, in this age of social media and online reviews, these investors will be doing their due diligence on you. Any good client would be. An advisory firm should be worried about taking on a client that didn’t research the firm. Are you the type of advisory firm you would want your parent or child to work with as a client?

Have you looked at your business from your clients' and your employees’ points of view? What are your contingency plans if you need to take extended leave due to a personal or family health issue? What about an unplanned leave? Also, what are your own retirement plans? If you are eventually contemplating selling your business either straight out, or to a partner? According to Investment News, your company may be valued lower by a potential purchaser if you don't have a succession plan.

Silence is the Enemy

Succession is such an important topic that it is analyzed in every FactRight Operational Due Diligence review, regardless of how long a sponsor has been in operation. You advise clients on their succession planning. You know the fear and anxiety that can stunt succession planning. Silence is the enemy. Empower yourself and your firm by planning for succession. It will benefit you, your employees, and, most importantly, your clients.


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Filed Under: Best Practices