Financial advisors’ succession planning often goes awry as good intentions are undermined by misalignment between firm owners and successors, a new study has found.
Owners and their designated successors frequently have a vision of opportunity but operate with different assumptions and unclear expectations, according to the industry survey by wealth management firm Kestra Holdings. While first-generation leaders (G1s) are often confident about the path forward, their second-generation successors (G2s)view themselves as stuck, undervalued and uncertain, with some considering walking away.
“In an industry facing a scarcity of next-generation talent, that’s a risk no firm can afford,” the study’s authors said.
The problem often is that first-generation owners have not fully prepared to transfer leadership to the next generation. Among first-generation leaders who plan to retire in the next 10 years, 69% express confidence that they can achieve their succession planning goals. But the survey revealed that 94% have not finalized at least one of the factors necessary for a successful transition.
76% have failed to develop a timeline for transitioning client relationships
78% have not worked out the timeline for their successor(s) to acquire equity
59% have given no equity to successor(s)
Second-generation successors can become frustrated with lack of planning, creating a flight risk, the authors wrote. G2 leaders complaints of owners’ lack readiness include:
Only 44% say their G1s are really ready to retire
53% say their practice owners lack clear, well-documented succession plans
45% don’t know when their G1s will retire
The study authors said second-generation dissatisfaction means they are more likely to walk away:
Only 30% of those who say their G1s are not prepared retire and transition leadership are committed to staying with their firm, compared with almost 75% who say their G1s are prepared
About 66% would consider leaving in the absence of a clear succession timeline
About 25% would consider leaving in the absence of being given equity or a timeline for receiving equity
The authors said first-generation leaders’ primary aim in succession planning is to ensure their clients continue to be well-cared for. The top challenge – identified by 53% of G1s – is finding G2s with aligned values and vision.
“The risks of delaying transition planning are high: risk to continuity of care for clients, risk of losing valuable talent, and ultimately risk to firm value,” the authors wrote.
The report offered these recommendations:
Formulate a structured and clearly communicated leadership succession plan. G2s want clarity in areas including their own retirement timelines, compensation structure and opportunity, and equity transfer plans.
Invest in G2 talent development. 84% of G2s want additional leadership responsibilities, usually in strategic planning and financial management, which are skills they will need to assume ownership. G2s say transparency and delegation in these areas are signs of trust that build loyalty.
Engaging G2s in planning. G2s who strongly agree that their G1s are fully involving them in succession planning and listen to their ideas for moving the practice forward are more than twice as likely to say they will stay with the practice.
The study found divergence between the first generation and second generation on a variety of topics.
Succession Plan
52% of G1s planning to retire in 10 years say they have a succession plan in place
53% of G2s say any plan is unclear or poorly documented
Alignment on firm direction
43% of G1s say they are fully aligned with their G2s
30% of G2s actually feel they are fully aligned with their G1s
Equity transfer
41% of owners of those planning to retire in 10 years have transferred equity
About 25% of G2s would consider leaving if there don’t receive equity and there is no equity timeline
Leadership responsibilities
G1s mostly delegate typical advisor tasks, such as planning)
G2s seek greater involvement in the firm’s strategy and financial management
Desire for leadership development
G1s often underestimate G2 interest, given the owners’ significantly lower interest in leadership development resources
G2s are twice as likely than G1s to want structured support for leadership development
Confidence
69% of G1s say they are completely confident they will achieve their succession planning goals
Only 44% of G2s say their G1 is prepared to retire and transition leadership
The Great Disconnect
The authors say there is a “great disconnect” between between the motivations of G1s and G2s is succession planning.
First-generation advisors’ say their primary motivation is ensuring their clients continue to get the high level of care they’ve built their reputation on. “After years of earning that trust — often through deeply personal relationships — G1s want to know their successors will uphold the same high standard of service and guidance,” the authors wrote.
One G1 advisor said for the survey that he would like his clients to say, “I took great care of them, made sure their needs and goals were met first and foremost, and ensured they were left in great hands, and a strong relationship was built before I left.”
Their second-generation successors say they are interested in the chance to build a satisfying career as an entrepreneur — making the decisions, free of a cap on earning potential — without starting from scratch or taking on the full risk of launching a new firm.
“Being in control is a big part of it,” a G2 advisor said. “Not having a ceiling is a big part of it. Making myself and my family proud is a big part of it. And growing something that ultimately is my own would be really exciting.”
Obstacles to Succession Planning
Owners say the biggest obstacle in succession planning is finding qualified G2s who share their vision and values. Making this more difficult, most plan to have at least two successors. The chief obstacles cited are:
53% Finding qualified advisors who share my vision/values
34% Not a priority now, I have plenty of time and am not in a hurry
29% Potential successors cannot afford to buy the practice
23% Time involved to train potential successor(s)
23% I’m busy, haven’t been able to make time for succession planning
17% Fear of “being burned” by potential successors (e.g., they leave for more money, poach clients)
15% Expense of hiring talented, trustworthy advisors
11% I don’t know enough about the succession planning process/next steps
11% None of the above/no obstacles
“The difficulty of finding a successor that matches your style of managing your client base — I think that’s the hardest part,” one G1 advisor said for the survey.
