Why is Succession Planning Important for Financial Advisors?

By Liam Mulligan, Kelley School of Business (Indiana University) Class of 2023

In the grand scheme of things, the industry of financial planning is still a relatively new addition to our country. Not until the end of the second world war did a large enough number of Americans suddenly find themselves with enough money to go beyond their forefathers’ paycheck-to-paycheck style existence, thus creating demand for professional advice on how to preserve this wealth for future generations. In fact, the first organized body for financial advisors, the International Association of Financial Planners, wasn’t formed until December 1969.

In these early days of financial planning, most of the focus was on products and tax planning needs for clients. And after a rewarding career spent diligently looking after clients’ interests, retirement-aged advisors had access to a fresh new class of young advisors to hand over the reins. Since then, however, things have changed dramatically in the financially advising industry. In today’s modern marketplace, a wise financial advisor will begin the process of planning for succession long before reaching retirement age. Here’s several reasons why.

Current trends

The scope of work undertaken by advisors during the early days of the industry is a far cry from the demands placed on advisors today. Modern advisors are tasked with managing an all-encompassing portfolio of clients’ household assets and needs, such as estate, education and retirement planning. These increased demands make finding a suitable replacement that much more difficult. And in addition to increasing demands, a smaller number of younger advisors are entering the career field, with advisors under the age of 40 representing only 11% of the total financial advisor population according to a 2019 study conducted by J.D. Power.

An additional study also shows that advisors’ job satisfaction declines significantly with the length of their tenure. And as the average age of advisors increases, new clients are trending younger every year and bringing in increasing amounts of assets to be managed, with median assets per advisor growing to a record high of $130M in 2020, a 9% increase over the previous year.

Client retention

If the past few years have taught clients anything, it’s the importance of having a skilled professional to help guide them through uncertain times and down markets. Likewise, client retention rates are at an all-time high, but it’s not to say that clients won’t switch their money managers, especially when market instability and a lack of communication causes them to lose confidence. To help mitigate client flight risk, advisors should have a plan in place in case something happens to that advisor, planned or unplanned that forces them to relinquish their responsibilities. Clearly communicating this plan to clients will help set them at ease and let them know that they will be taken care of in the event of an emergency situation.

Preserving a life’s work

Building a solid book of business is often the result of many years of hard work to produce results, earning trust and building strong relationships. Many senior advisors spent the first ten or more years of their careers prospecting before clients began coming in from referrals. With so much time and effort spent building a solid book, it should be one of an advisor’s worst fears to throw it away or watch it slowly disintegrate due to clients feeling that they aren’t having their needs met anymore.

How to start a succession plan

With so many relationships built as a result of years of hard work and earning trust, planning for succession isn’t as easy as dumping clients off to younger advisors. Senior advisors must slowly transition clients to another qualified person or team of people, continuing to be present throughout the transition to build trust in the new advisor(s) and preserve the relationships. Finding these qualified successors is a challenge of its own, especially with fewer young people entering the industry. Advisors need to be aggressive in their recruiting and talent retention efforts. Young professionals will want to accept a position with advancement opportunities and a clearly defined career path. Making these available to new recruits could mean the difference in success or failure to find qualified successors.

Finding the right people to take over client accounts is a long process. The complete arc of hiring, training and mentorship, and transitioning clients to that successor can take up to 15 years in some cases. Just as financial planners will advise their clients to start saving for retirement sooner than later, it is equally as important for advisors to begin planning for their succession long before they reach retirement age, to ensure that their personal satisfaction along with their clients’ best interests are protected for years to come.

Contact us today to learn more about how L.M. Kohn helps advisors and clients alike prepare for the future.