A Business Coach’s Tips for Advisor Succession

There’s no question about it: whether you’re retiring from your advisory practice or acquiring a book of business, succession is a major milestone for you and your team. I’ve been in the financial services industry for over 50 years, first as an Advisor and more recently as a business coach. In that time, I’ve learned that in any succession scenario, a smooth transition is key to avoiding any interruption in the high level of service your clients expect—and that to ensure a smooth transition, you need a strategy.

From team dynamics to maximizing the value of your business, there are many factors to consider in any transaction. With that in mind, here are four things every Advisor should know about succession planning:

#1: The role of an Advisor has changed

It’s no secret that over the past several decades, there’s been a seismic shift in the financial services industry, with many Advisors moving from a traditional stockbroker approach to a more comprehensive, fee-based financial planning model. At one time, you could be a great Advisor by being primarily a stock-picker. But that’s getting harder to do because the value proposition of an Advisor has changed. In a 2016 Ipsos survey of Canadian Advisors:

• 98% of respondents said that they’d observed a shift toward fee-based practices.
• 83% said that a fee-based model was better than a commissions-based model for their practice.
• 76% said that fee-based was better for their clients.¹

In short, not only are Advisors making the switch, but they’re happy they did so, and their clients are happier as well. A more recent study confirmed Advisors’ satisfaction with making the change. Among Advisors who had grown their fee-based AUM in the previous three years:

• 70% said that they’d also realized steadier and more predictable revenue.
• 49% said they’d experienced increased revenue.
• 49% reported an overall increase in AUM.²

This begs the question: aside from positive effects on the bottom line, what’s behind this trend? It can be credited, at least in part, to a generational shift. In a 2021 survey, a whopping 72% of clients born after 1965—that’s Gen X, Millennials, and Gen Z—said that they prefer services that go beyond just financial advice and investment management. Only 32% of Baby Boomers—clients born before 1965—said the same.³

The key insight here is that client expectations have changed. Instead of being a specialist whose “secret sauce” is based on stock selection, the role of Advisor has evolved into something more—a coach, a counsellor, and a confidante. That’s a much deeper responsibility, and in the context of succession, it makes ensuring that there’s a good fit between buyer and seller even more essential.

#2: Fit is the most important part of a transition

Regardless of which side of the transaction you’re on, fit is the most important aspect of a transition, because it forms the foundation for the partnership between buyer and seller and sets the tone for how clients will be treated in the future.

In some cases, the choice of successor is obvious—in a family-operated practice, for instance, or when the successor is in-house. But even in those cases, there’s no guarantee that there will be an ideal culture fit. In my work as a coach, I once encountered a situation where a father fully expected to transition his business to his son—right up to the day when the formal hand-off was to take place and the son said he didn’t want to be a Financial Advisor. You can understand how important it is to make sure both sides are on the same page, especially when a successor isn’t preordained.

From the retiring Advisor’s perspective, when a successor is being chosen from outside the business, it’s important that they be selective and spend time developing a profile of the type of successor they want. I like to divide fit and culture considerations into two categories: personal and professional.

On the personal side of things, it boils down to this question: are buyer and seller on the same page, or are their contrasting styles going to give the clients whiplash? If an Advisor has a folksy practice and clients have come to expect that they’ll be treated as friends, a successor who has a different personality and communications style can create a mismatch, even if they’re aligned on other things. In my experience, the best transitions happen when the buyer and seller like one another on a personal level, and that forms the basis for a partnership built on trust.

Professionally, an outgoing Advisor will want to look for a successor who can deliver on the established capabilities of the business and add to them if possible. Many of the retiring Advisors I’ve worked with aren’t just looking for a ‘mini-me.’ Instead, they want someone with a complementary philosophy but expertise in different areas—someone who can provide more and better services for their clients. So, for instance, if an Advisor’s focus has typically been on investment management, they might want to find a successor with a strong background in financial planning or insurance to grow the business’ capabilities.

The reality is that many succession deals don’t work out. Anecdotally, based on my experience as both an Advisor and a succession planning coach, I’d guess that at least half of first attempts at partnering through a succession plan fail, either because of fit or because of misaligned expectations. I’ve even seen a situation where a deal fell through at a late stage and one party physically ripped up a cheque as they walked away! Aside from a fit mismatch, there can also be red flags around compliance and regulatory issues—that’s also something a retiring Advisor will need their due diligence to investigate.

#3: Communication with team members is essential

Transitions can be an extremely delicate time for team members. Depending on the situation, there may be uncertainty about their role or whether they’ll even have a job after the transition. In some cases, the succession plan is obvious, like with a family-run business. In those situations, the team is likely to be aware of the transition process well in advance, even if there isn’t a formal announcement. But of course, that’s not always the case.

Most transitions happen over a period of time, sometimes years. Very few Advisors simply circle a date on the calendar and walk off into the sunset at five o’clock on that day. A transition over a period of 18-24 months is fairly common. The greater that lead time and the better the fit between the outgoing and incoming Advisors, the more comfortable both team members and clients will be, because they’ll have a better idea of what to expect. And in an ideal world, the buyer and seller will take equal responsibility for ensuring a smooth transition process, because they’ve got a shared responsibility to their clients and staff.

So, when should an Advisor tell their team members about a deal? The rule of thumb is to tell them as soon as you can, as long as it won’t jeopardize the business or the deal in any way. Of course, confidentiality can sometimes be difficult to maintain, because as the buyer and seller get deeper into the negotiation, the buyer will likely start requesting more information about the business—that’s a dead giveaway to staff that a sale is coming. I once saw a situation where the buyer thought that an agreement had been reached but the seller thought it wasn’t a done deal. One day, much to the seller’s surprise, the buyer invited all of the seller’s office staff to be friends on Facebook. He had originally been one of the seller’s competitors, so the buyer’s team was totally confused as to what was going on. The founding Advisor eventually had to fess up that he’d been talking to the buyer for six months, and it made for an awkward situation.

I always say: if you’re not talking with your team and clients, they’re probably talking amongst themselves. They may be worried about their future, so whatever you can do to give them a degree of certainty will be beneficial to your business operations—and it’s also just a nice thing to do.

#4: Using managed money can help maximize the value of your business

Maximizing the value of your practice is something that most Advisors would like to do under just about any circumstance, but it’s especially important if you’re readying your business for a sale. The bottom line is that, from a valuation standpoint, practices that use third-party managed money are worth more on a dollar-for-dollar basis than discretionary practices—in fact, in a 2021 study of over 750 Advisors, 84% reported that a higher valuation for their business was a tangible benefit of outsourcing.⁴

Why is that? For one, it has to do with the business’ reliance on the owner—less reliance is generally perceived by buyers as less risk that the business will decline post-purchase when the founder’s contributions are no longer available. Secondly, it’s a question of fit, and of supply and demand. If you’re an Advisor who is primarily a stock-picker, you’ll probably want another stock-picker as a successor, since your clients probably view that trait as being your practice’s “secret sauce.” But given the growing prevalence of fee-based practices, trying to find another stock-picker as a successor narrows the market considerably. In the valuation process, in very broad terms, one dollar of recurring revenue is typically worth about three times as much as one dollar of non-recurring revenue. Obviously, if my goal is to maximize the value of practice, I want as much recurring revenue as possible. That’s much easier to accomplish using managed money and a fee-based structure, because your revenue—and the client’s returns—aren’t predicated on picking the right stocks and timing the market, which can be a challenge even in the best of circumstances.

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It goes back to what clients expect out of an Advisor—and increasingly, it’s services beyond just financial advice and investment management. Advisors that make the switch to managed money still have their “secret sauce.” It’s just that the ingredients have changed.

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¹ Ipsos survey conducted on behalf of Vanguard from July 16 to September 1, 2015.

² The 2021 Fidelity Financial Advisor Community—Outsourcing Study.

³ The 2021 Fidelity Investor Insights Study.

⁴ AssetMark, The Impact of Outsourcing, 2022.

⁵ Risk tolerance measures the degree of uncertainty that an investor can handle regarding fluctuations in the value of their portfolio. The amount of risk associated with any particular investment depends largely on your own personal circumstances including your time horizon, liquidity needs, portfolio size, income, investment knowledge and attitude toward price fluctuations. Investors should consult their financial advisor before making a decision as to whether this Fund is a suitable investment for them.