Financial advisors ready to begin the succession planning process amid the COVID-19 pandemic may find that the usual strategies no longer apply.
That’s particularly so for independent advisors hoping to recruit and groom a younger heir to eventually take over their books of business as some experts warn the process has become slower and more challenging because of the pandemic. Add widespread expectations of ongoing market volatility to the mix and the result is a growing divide between what older and younger advisors are willing to provide one other to facilitate a smooth succession.
“When I talk to younger advisors about being on the other side of that deal [to buy a retiring advisors' book], they say they can’t get anybody’s attention,” says George Hartman, president and chief executive of Market Logics Inc. in Toronto, who coaches advisors on practice management matters, including succession planning.
“[These younger advisors] say, ‘I can’t get a seller who is willing to bring me in and tutor me to take over the business eventually. They want me to come in with my own book of business and basically be self-supporting and that, perhaps over time, they will sell me little pieces of the business and maybe 100 years from now, I’ll own it,’” he says.
David Grau Sr., president and founder of FP Transitions in Lake Oswego, Ore., and author of Succession Planning for Financial Advisors: Building an Enduring Business, says that more senior advisors often fail to see the challenges their potential successors face, especially during uncertain and volatile times.
“Can you attract the next generation of talent into the business during tough times when the workload is heavy? Can you get a 32-year-old with a [certified financial planner designation] excited about the idea of working 60 hours a week and then going into debt for 20 years to buy you out?” Mr. Grau says.
As such, Ian Cullwick, partner at Mercer Canada Ltd. in Ottawa, says advisors at larger firms, in particular, shouldn’t assume their subordinates will automatically become successors.
“Do [older advisors] actually take the time to ask their existing employee base if they have an interest [in purchasing the business eventually]? In other words, don’t assume everybody has an interest in moving up and taking on more work,” says Mr. Cullwick, who’s also a faculty member at the Queen’s University Industrial Relations Centre, at which he’s teaching a course on succession planning this fall. “It’s something very basic but also critically important. Some people simply may not have that interest or might have an emerging interest but they might not feel ready whenever you’re ready [to retire].”
On a practical level, though, Mr. Hartman says the pandemic doesn’t alter the logistics of succession planning.
“Advisors aren’t going to hang a ‘For Sale’ sign outside of their offices, anyway. It doesn’t give clients much confidence if they do that. So, I don’t think, in this type of environment, that aspect is going to make a whole lot of difference.”
The real difference-maker for advisors looking to build a strong succession plan is time. Mr. Grau writes in his book that the optimal time to start the process is when an advisor turns 50. Yet, most of his clients at FP Transitions, Mr. Grau says, “are around age 60.”
The COVID-19 pandemic has “highlighted the importance” of succession planning among advisors, says Wendy Leung, senior consultant with Diamond Consultants, in Morristown, N.J.
“Unfortunately, if you haven’t already thought about succession planning and you haven’t started going down the different paths and evaluating the different options, it’s not something you can press the fast-forward button on and get done quickly,” she says. “You might be able to set up a contingency plan, a break-glass-in-case-of-emergency plan, but not a real plan in which you have really considered all of your options. That does take some time.”
The key, Mr. Hartman says, is creating a succession plan that focuses on building enterprise value.
“I had tried several times in the past to expand my business, to bring in other coaches and things like that, and people always came back to me and said, ‘No, George, we want you,’ which was always very flattering, but didn’t really help me accomplish my [succession planning] objectives,” he says.
Now, Mr. Hartman says his business is built around content instead of his personal brand.
“I don’t want to be featured front and centre. I want to guide and provide direction, but I want to build it as an organization in which the goodwill rests in the organization itself and not necessarily in me,” he says. “That’s my plan, I’ve set a five-year goal and am looking forward to spending more time doing nothing.”
Even with a clear and detailed succession planning, there’s one final hurdle that advisors who are planning to retire rarely see coming, says David Bernstein, senior consultant at IG Wealth Management in Toronto.
“Just because you have a succession plan written down on a file somewhere that says what you’re going to do, to make that emotional and psychological leap to say, ‘Yes, I’m actually going to start doing this,’ is a very difficult process,” says Mr. Bernstein, who put his own retirement plan in place after turning 60 years old in July. “I definitely went through that.”
Given all the challenges, nuances and uncertainties involved, Mr. Grau says it’s understandable why so many advisors simply choose to ignore the issue for as long as possible. Yet, the longer they delay paying attention to succession planning, the fewer the options advisors will have that are available to them.