The average age of advisors has been increasing for some time, making succession planning a necessary consideration, but a new Cerulli white paper finds that many advisors don’t yet have a plan.
In fact, within the next 10 years, 37% of financial advisors—collectively controlling $10.4 trillion or 40% of total industry assets—are expected to retire, yet one in four advisors who are expected to transition their business within the next 10 years are unsure of their succession plan.
As such, advisor retirements represent a significant ongoing opportunity for the next generation of advisor talent, who may be in a position to acquire a book of business from a retiring advisor within their practice, and for external firms that are inclined—and in a position—to pursue inorganic growth.
These findings are contained in “Transitioning Your Practice the Way You Want,” research that is part of a four-part series issued by Cerulli and sponsored by Commonwealth Financial Network describing the challenges and opportunities advisors face as they explore independence, including transitioning their business as they approach retirement. Qualitative research interviews were conducted by Cerulli in January and February 2022 among 1,500 advisors across employee and independent channels. Research participants were required to have a minimum of five years of experience as an advisor and $50 million in assets under management (AUM).
In addition to the one in four who are unsure of their succession plans, Cerulli estimates that nearly half of the advisors retiring within the next 10 years operate within a solo practice. “Some of these solo advisors are likely to think soon about teaming up with another advisor who can take over the business when the time comes, or will represent opportunities for external acquirers upon retirement,” the report states.
However, with 49% of advisors identifying as being open to or actively searching for practices to acquire, competition for the acquisition of these practices is strong, resulting in higher multiples and other advantageous deal terms for many sellers.
“Advisors have a diverse range of objectives that they pursue with their succession plans,” says Michael Rose, Associate Director of Wealth Management at Cerulli Associates. “Given the amount of assets controlled by this cohort, it is essential that advisors define those objectives and determine the best path to achieve them, far in advance of their transition.”
Transition Landscape
Advisors’ succession planning options can vary depending upon whether they are employees of a captive broker/dealer (B/D) or independently affiliated, the report observes. Independently affiliated advisors often have a wider range of succession options, including the ability to build larger, long-lived multi-partner organizations that provide a path to equity ownership over time to facilitate internal successions, in addition to external sales.
In evaluating potential successors, Cerulli found that advisors place the most importance on personality of the acquiring advisor (88%), likelihood to put the client’s interests first (85%) and the regulatory/compliance record (85%). “It is essential that there is a strong alignment of core values, service delivery and investment philosophy between firms,” says Rose.
Meanwhile, style differences with the seller (52%), client transitions from the seller to the buyer (48%) and overall time commitment to finalize a deal (48%) are the top challenges for advisors acquiring a practice, according to the practice management professionals Cerulli interviewed.
While the sale of an independent practice to a third party can occur with comparatively little lead time, creating a multi-owner enterprise with a clear internal path to succession takes significantly more, the report cautions.
Practices considering internal succession should pursue transparency while embracing the concept of shared equity ownership as part of their culture. “Communication with the next generation of advisors is essential to retention. It is important to recognize that talented advisors will only wait so long for ownership opportunities to come to fruition,” observes Rose.
For independent firms considering the sale of equity to the next generation advisors on their teams, the research recommends securing sources of financing for them. “The next generation of advisors may not have the resources to pay out of pocket,” Cerulli’s Associate Director of Wealth Management advises. According to the research, sources of financing tend to be diverse in nature and can be seller-financed or involve loans from platform partners such as IBDs, custodians, banks and private equity firms.
Regardless of whether a business transition is done through sale to a third party or through internal succession, the paper suggests having strategic partners that can advise independent firms on the various elements of their succession plan.
“A strategic partner is critical to helping firms navigate options whether they’re thinking ahead about succession or driving growth through acquisitions,” states Kenton Shirk, Vice President of Practice Management at Commonwealth. “A partner firm can also assist with key elements of a transition, including financing, valuation resources, guidance on terms and structure, sourcing prospective candidates and more.”
