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Most FAs Ignore Risks of Failing to Plan Business Exits

By Garrett Keyes April 30, 2018

The vast majority of financial advisors are failing to plan for their firm’s future – only 27% have a formal documented plan, a recent Financial Planning Association study reveals. Despite most advisors understanding the risks of not having a succession plan, the rate of planning remains largely unchanged from the reported 28% in 2015, the study finds.

Experts say many FAs simply find it difficult to create a succession plan. Some 51% of advisors think the biggest challenge in succession planning is finding the right successor. Other top challenges include retirement concerns, business structure, and the mechanics of plan creation. And preparedness differs dramatically depending on the size of the firm. Sixty percent of FAs in firms with $500 million or more under management have formal succession plans but only 13% of FAs managing less than $50 million have established succession plans.

Thomas Ruggie, president of Ruggie Wealth Management, a firm with $616 million assets under management, says the disparity in succession planning between large and small advisories is linked to smaller firms having a different understanding of the nature of the firm.

“Up to a certain size [in assets under management] you have a lifestyle business instead of a true business,” he says. For this reason, Ruggie says advisors with fewer assets under management might simply assume their business will close when they retire.

He also says smaller advisors lack succession plans because organizational transitioning can be difficult when advisories revolve around one person. When one person holds the firm vision and “everything runs the way it is structured in that person’s head,” transitioning to another principal can be difficult.

Dana Brewer

Dana Brewer, principal and financial advisor at Birchwood Financial Partners, agrees that transitioning an organization is difficult. Birchwood, a firm with $380 million under management, has been refining its succession plan over the past seven years. It can be difficult ensuring everyone involved understands how the plan comes together and what their roles will be, she says.

Despite the difficulties, Brewer says she understands the risks of neglecting planning. If you don’t have a plan established it can often cause an unintended external sale, which often ends in failure because it is not planned properly, she says. And clients and existing employees may choose to leave the firm following an unsuccessful transition.