I recently attended Dimensional Fund Advisors' two-day conference on Succession Planning in Santa Monica, Calif. Personally, had I attended a conference like this five years ago, it would have been invaluable to me. The DFA meeting was a phenomenal event nevertheless, and it validated many of my own key points that I've shared with advisors who are considering their succession plan:
- Start early.
- Be realistic about valuations.
- Be ready to actually sell and step aside.
Realistic Succession Planning Step No. 1: Start Early
This may seem obvious and you've heard it before. But who has time to stop and think about a succession plan? You do, even if you think you don't. It's critical that you make time—now—to start thinking about the fate of your firm, even if you're planning to be around for another five, 10, or 20 years.
The sooner you start, the more time you give yourself to evaluate potential buyers and to think about a smooth transition for your clients. Don't short-change your clients, your staff or yourself by putting off until tomorrow what you can be thinking about today.
Broker-dealers and custodians have taken the initiative and started thinking for you, offering workshops and programs (Fidelity Institutional Wealth Services), a practical guidebook for succession planning (Pershing Advisor Solutions) resources (LPL Financial) and even full-fledged services (Schwab Advisor Transition Services), designed to help you benchmark your firm's health, goals and exit strategy. And though Schwab reported in its 2011 RIA Benchmarking Study that the number of its RIAs with a clear succession plan was a staggering 60%, the rest of us seem to be procrastinating.
In a 2012 survey by InvestmentNews, just 7% of 400 advisory firms responded that they have executed a formal succession plan, and only 15% said that they have prepared a plan.
So why aren't more advisors listening to blog posts like mine (see here my previous posts on the subject) that tell them they need to start early on a carefully-crafted exit strategy? It's not just a lack of time. Business owners—myself included—will tell you that giving up something that you've worked so hard to build from the ground up isn't a task you can easily ship off to the highest bidder. That takes me to the next two points: be realistic, and be ready to sell and step aside.
Realistic Succession Planning Step No. 2: Be realistic about valuations
There is this misconception that a number of giant, ultra-successful firms are just waiting to swoop in and buy you out. Unfortunately, those expectations are always too high.
