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When planning for retirement, the biggest challenge advisors face is finding a successor who shares the same values on managing client affairs and protecting the firm’s reputation.

FangXiaNuo/iStockPhoto / Getty Images

After a 29-year career in financial services, Rob McClelland doesn’t plan to retire for at least another decade, but he has already started thinking about how he’ll wind his practice down.

The 58-year-old founder of McClelland Financial Group at Assante Capital Management Ltd. in Thornhill, Ont., at which he’s senior financial planner and co-branch manager, hopes to transition his business to younger advisors at his practice. However, he says that will require significant development and training for the junior members of the team to take on a book of business with 700 client relationships and more than $500-million in assets under management.

“Our difficulty is that it’s a big practice, and it’s not like I could transition [the book] to one person,” he says. “It would need to be a team that would take it over. We’ve given it a lot of thought in terms of how we’d like to [make the] transition, but we don’t yet have a solution.”

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Mr. McClelland’s concerns are shared by many advisors. In the United States, almost one-quarter of advisors who plan to retire in the next decade do not have a succession plan in place, according to a 2019 report from Boston-based research firm Cerulli Associates. And with more than one-third of advisors expected to retire over the next 10 years, almost 39 per cent of industry assets will need to be transferred to other advisors or practices.

Concerns about succession planning are equally pressing in Canada as we have a similar aging demographic of advisors, says George Hartman, president and chief executive officer of Market Logics Inc. in Toronto, who coaches advisors on practice management matters, including succession planning.

“I would say that the number [of advisors who don’t have a succession plan] is probably understated,” he says. “Many people will say that they have a succession plan, but when you ask what’s in it, there’s very little. If anything, they have some notion in their minds of when they want to exit the business, but they haven’t thought about the mechanics of actually doing it.”

Many advisors haven’t identified a successor, planned out a transition strategy or have undergone a valuation to understand how much their business is worth, Mr. Hartman says. While succession planning should start at least five to 10 years before retirement, he says many advisors typically begin working on these elements only two years in advance. If advisors fail to explore these factors early on, they can be left scrambling to transition or sell their practice.

The most popular option among advisors is to exit the business partially by maintaining their top clients, while transferring the rest of the practice to a junior associate, Mr. Hartman says. But those top clients typically represent 40 to 50 per cent of the firm’s business, leaving other advisors in the firm with smaller books. This move also reduces the value of the business, which means it sells for less than what the advisor expects.

And as the average age of advisors inches higher, there are fewer candidates to take over the business. When planning for retirement, the biggest challenge advisors face is finding a successor who shares the same values on managing client affairs and protecting the firm’s reputation.

“There’s a lot of work to be done to identify the right successor, to integrate them into the practice and introduce them to clients,” he says. “When you’re leaving the business and handing it over to someone else, you’re handing over your legacy. If they do a good job, then your legacy is enhanced. If they do a bad job, then your legacy diminishes.”

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While demographics play a role, funding is also a challenge for more junior advisors. Even if it’s a team of in-house associates taking over the business, they often don’t have the money required to purchase the business at its valuation. In some cases, successors would need to buy into the practice over several years or seek out external sources of funding – and that can take time, says Julie Littlechild, founder and CEO of Absolute Engagement.

It’s also up to advisors to recruit and train younger talent in a way that allows these junior associates to take over the practice seamlessly with the least impact on clients. Experienced advisors need to put clear development paths in place long before retirement so that team members are being groomed to take over the business.

“You have to think about that in a very intentional way,” she says. “It’s not just hiring a team, it’s finding a successor – and that’s a very different equation.”

Poor succession planning could also put advisors in a situation in which their own retirement and financial well being is compromised. In some cases, advisors depend on selling the book of business to fund their retirement or supplement other plans. If they are unable to find a successor, the backup plan relies on selling the business to another firm. Failing to have a transition plan already in place could hinder the sale.

“For most [advisors], the sale of their business is a significant part of their retirement plan,” Ms. Littlechild says. “And if they haven’t done this well, then they could reduce the value of the business and their own financial future substantially.”

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