As an advisor, you’ve likely heard of “The Great Wealth Transfer,” when roughly $30 trillion to $68 trillion of accumulated assets will transfer from Baby Boomers to younger generations. You’ve likely been preparing your wealthy clients by periodically reviewing their estate planning documents, exploring using trusts to facilitate complex legacy wishes, or utilizing proactive gifting and estate strategies to transfer wealth before death.
However, a successful approach to this impending event necessitates another generational transfer process: the internal transfer of these assets from baby boomer advisors seeking to reduce hours and transition client relationships to younger associates.
The percentage of boomer-led advisory practices needing a succession plan is alarmingly high. Studies consistently find that over two-thirds of such practices do not have the people or processes in place to transition their clients to a trusted colleague or team. These numbers are even more dire among solo-advisor practices.
As with estate planning for your clients, there are no shortcuts to your succession planning. A seamless, client-centric transition requires significant investments of time and resources. Following a blueprint for attracting, developing and retaining a young advisor is essential to continue your practice and legacy.
Here are some tips for your business succession planning from the perspective of next-generation advisors.
Create a clear career development plan
From our perspective, the lack of a defined career path is the surest way to see a well-intentioned succession plan go up in smoke.
We have seen countless examples of young advisors leaving a practice a number of years into the owner’s planned transition period. In many cases, the young associate is uncertain about continued career progression or unwilling to wait indefinitely for the next step in their development or expansion of their experience and responsibilities.
Advisors looking to hire a young advisor as their successor must clearly define and follow a career development plan to ensure retention. When interviewing potential successors, you should lay out a clear vision for the candidate’s progression from a new associate to the eventual new owner or co-owner of your practice.
Your development plan should be part of your new hire contract. It must include your tangible investments and pledges while setting timeframes and expectations for the young associate to reach key milestones in their progression. Instead of telling your new hire, “One day I want to have you involved in all of our client meetings,” pledge to them that “provided you do A and B, you will be observing my meetings with these clients within X months and serving as the primary advisor to at least Y families by year Z.”
Adding performance contingencies on the part of the younger advisor is good practice, provided they are realistic and attainable targets. These qualifiers demonstrate that your commitment to the succession plan carries expectations of the young associate to commit to you and the practice’s needs. Your young advisor must earn the transfer of your life’s efforts through personal accountability to uphold their end of the bargain.
Memorializing a defined career development path from support efforts to client-facing work in writing as part of your employment contract will make it more likely you retain your young associate versus issuing a nonbinding verbal promise. After you and your young advisor agree to a career development path, reviewing their progression routinely is essential. Make it part of their annual review. The alternative is to risk sinking countless hours and resources into this person only to have them leave and apply your investments at another firm.
In addition, some type of formal agreement is recommended. A tangible option is a buy-sell agreement between the firm owner and the young associate.
Commit to your successor’s education
The cost of required industry licenses, like FINRA fees, is a standard cost expected to be paid or reimbursed by you as an owner. You can set yourself apart from other practice owners and increase the likelihood of a successful succession plan by pledging to cover costs for advanced education or certifications.
The high cost of achieving and maintaining these credentials is often prohibitive for new advisors if they must pay out-of-pocket. They are also not eligible, under current law, to deduct education expenses as employees. Meanwhile, education expenses generally qualify as deductible business expenses for business owners, even if they are incurred for the benefit of other team members. Alternatively, you can reimburse your young employee for these costs upon completing and passing sections of the curriculum. This is a similarly-deductible expense for you as the owner (although a taxable addition to the employee’s income).
Another way owners can stand out in the job market is by offering paid time off to study for intensive exams to increase the odds of a successful pass on first attempts. While this level of commitment to a young associate’s education may attract more talent, it is rarer and financially untenable in the case of some solo advisors. Encouraging your young advisor to join professional membership associations, or paying membership dues on their behalf, is an additional and often more economical way to promote continued learning.
A final option is to orient your associate to certifications that align with the needs of the firm as well as their passions or preferred areas of expertise. While the Certified Financial Planner™ certification is ubiquitous and desirable to many young advisors and clients alike, many new to the industry are not as aware of the Chartered Financial Analyst and Certified Investment Management Analyst® as options for those seeking to specialize in investment management. Even less know about the Enrolled Agent designation, an excellent program for those interested in tax planning who lack the prerequisites or inclination to pursue Certified Public Accountant certification. Connecting the young associates with programs targeted to disciplines that fit their desired and possible niche knowledge bases can go a long way to show you support your successor’s educational advancement.
Develop a robust training and management program
A successful transition of your business requires your successor to have comprehensive knowledge of your practice and services. If you are confident that your new associate can inherit your business, you should immediately begin the transfer of your institutional knowledge.
There is value in having your new advisor learn the back-end of the business before or concurrently with developing client-facing skills. First-hand experience with the work involved in operations, investment management, marketing and business management will help your young associate better understand your practice. That creates many interpersonal benefits beyond their personal development, including an appreciation for the specialists that allow your business to function and confidence in communicating expectations to your clients.
We have found the best succession programs often involve a formal program of working alongside other members of your team in these non-client-facing functions. Sitting down with your planning specialist to observe and work together on plans can help your successor build technical competency with the software and learn more about your clients and the inherent assumptions built into your advice.
Likewise, collaboration with your operations manager will teach the young advisor to understand the mechanics of completing financial transactions, reducing the likelihood of future errors in completing paperwork or processing service items. We have found that two to four weeks per module is a good foundation for your successor to develop a comprehensive understanding of your firm.
Clearly outlining and communicating a program upfront will dramatically increase the likelihood of success for your succession plan. The immediate commitment to helping your young advisor learn all aspects of your business conveys your seriousness about developing them into an advisor capable of running your practice. Transparency during the business management module, including sharing and discussing firm financials, will also build trust and help your associate begin thinking like an owner instead of an employee.
We can distill all the recommendations above into a single word: investment. In the past, you’ve likely needed to make substantial investments in your business to drive growth or achieve outcomes. In many cases, these investments may have been upfront or without a guarantee of receiving a return on those funds, requiring only your evaluation and instinct to determine the worthiness of the investment. Successfully transitioning your business and preserving its legacy requires discernment and willingness to commit funds and time when needed.
In our experience, succession plans fail because the firm owner is reluctant to spend a minimum amount of time and money on what they consider the responsibility of the inheriting advisor. However, the transition of your business requires tangible commitments from both parties. Your willingness to spend strategically to invest in your young associate’s development will maximize the chances that both you and your clients will benefit from a seamless transition.
Kevin R. Clark is a financial advisor at Highview Advisor Group, a private wealth advisory practice of Ameriprise Financial Services LLC, and the owner of Arch City Tax Services LLC. He is CFP and CIMA professional and a holder of the IRS’s Enrolled Agent designation. Kevin is the past president of FPA NexGen and a program advisor to The Ohio State University’s Student FPA. He is graduate of Ohio Northern University.
Amie Agamata is a CFP professional in San Diego, Calif. She is the 2023 FPA NexGen chair, nationally. Amie also serves on The American College of Financial Services Alumni Council as the co-chair for the Recruitment and Recognition Committee.