Financial advisors are skilled at building comprehensive retirement plans for their clients, but many are still falling short when it comes to planning for their own golden years.
According to a new survey from Environics Research conducted on behalf of Investment Planning Counsel Inc. (IPC), just 24 per cent of Canadian advisors who plan to retire within the next 10 years have a complete, detailed succession plan in place. A further 15 per cent have started but not finished working on a formal plan, while 41 per cent have a “rough idea” of what they will do. One in five (20 per cent) have no plan at all.
That’s of concern because the “best plans” are often prepared five to 10 years out, says Thomas Raidl, chief administrative officer, private client group, at Raymond James Ltd., in Vancouver.
Adds his colleague, Scott Hudson, senior vice-president, private client group, in Toronto: “Succession is something that needs to be planned out in advance so it can take place in an orderly fashion over multiple years, [resulting in a smooth execution] for clients, for the rest of the team, for the firm and for the successor advisor.”
Whether advisors feel too busy to start a complex process, are having too much fun running the practice to imagine a future without it, or struggling with the idea of making themselves redundant, Mr. Hudson says that, “Too often, it’s kicking the can down the road … ‘I’m going to do that next quarter.’ People have good intentions, but sometimes it just never comes to pass.”
The Environics/IPC study points to another barrier: advisors may not be getting all the succession planning support they think they need from their firms. What are they looking for? The vast majority believe dealer support is important to help advisors formulate a high-quality succession plan (90 per cent), provide solid support for clients through and beyond the transition (89 per cent), and enable advisors to maximize the sale price of their book (87 per cent). In addition, 82 per cent of advisors want access to expert resources, such as legal or accounting support, and 77 per cent would like coaching or one-on-one expert guidance.
Other concrete ways firms can help include providing a formula for calculating the value of an advisor’s practice and a statistical analysis with a breakdown of clients by age, assets under management, account type, product type, and recurring and non-recurring revenue, says Christine Timms, a former advisor in Toronto who has written handbooks for advisors covering topics such as transitioning clients and exiting the business. She says dealers can also serve as matchmakers, recommending potential successors as needed.
“Many advisors don’t have an obvious successor, and … that stops them from putting the plan together,” Ms. Timms says. “The other thing is that most advisors have not articulated in writing, exactly, is what it is they do for their clients. … It’s pretty hard to inform and choose a potential successor when you haven’t really documented what you do for people.”
A truly comprehensive succession plan has three distinct elements, says John Novachis, executive vice-president, corporate development, at IPC in Mississauga. All advisors should have a business continuity plan to address unexpected crises, from being hit by a bus to the arrival of a pandemic. They should also have a plan for identifying, developing, and growing talent that will ultimately replace them. And as advisors get closer to retirement, they need the third element: an exit plan.
At IPC, advisors are encouraged to start the process through programs that support identifying potential peer and next-generation successors. The firm also offers to buy senior advisors’ businesses, working with the seller to transfer clients to another IPC advisor.
“We’ve done 42 of these transactions thus far – about $4-billion in assets – and it’s really hitting an important need,” Mr. Novachis says. “To many advisors, their business could be one of the largest assets on their net worth statement. … There are not many people who can write that cheque.”
He adds that when advisors fail to create a succession plan, it poses a risk to the industry as a whole.
“I estimate there’s probably $200-billion to $300-billion of assets being managed by independent advisors in Canada who are approaching retirement age. If there isn’t a solution for those [eventual successions], we have a real challenge,” Mr. Novachis says.
That’s why there is value in starting the conversation about succession planning as early as during the recruitment process, says Katrine Clark, principal, branch team talent acquisition, at Edward Jones in Mississauga.
“As we hire more and more experienced advisors into the firm, no matter what their age or stage of practice, we’re talking to them about what our retirement plans and client transition plans look like,” she says. “You’re getting that conversation out of the way early. We all need to think about succession. … The pandemic caused us all to realize that many things happen in life that we don’t plan for. This is something you can plan for.”