A Strategic Succession Plan Can Boost Long-Term Business Value, Says SEI

Eliane Chavagnon

13 March 2013

While the majority of financial advisors are at least 50 years old, 68 per cent do not have a formal succession plan for their businesses, according to a new SEI poll.

The survey also found that 54 per cent of the around 100 financial advisors surveyed do not have a strategy in place to attract younger investors, despite what the firm describes as their “aging client bases.”

SEI said the findings point to a need for advisors to realize the importance of creating a strategic succession plan, with a focus on building long-term business value and sustainability.

“Simply preparing a succession plan is no guarantee of successfully transitioning the firm to new owners, but it is an important step,” said John Anderson, head of practice management at SEI Advisor Network. “Rather than preparing a plan to sell your firm, you need to prepare your firm for sale.”

Advisors should begin by taking an in-depth look at their book of business and processes, he added. “It’s important to have a plan in place to develop the next generation of leaders at your firm and to take a strategic approach to securing the next generation of clients your firm will serve.”

Meanwhile, SEI said the survey also showed that even advisors with formal succession plans may “lack specifics in those plans.” Illustrating this, 39 per cent of those with a succession plan said they’re not sure to whom they’ll ultimately transition their businesses.

Almost half of those polled (47 per cent) with formal succession plans said they intend to transition their businesses to “an identified internal buyer,” while only 14 per cent plan to transition to “an outside buyer,” the firm said.

Recommendations

Based on the findings, SEI said it has identified six ways by which advisors can enhance the value of their firms:

1. “Understand younger investors” - The firm highlights that a surprisingly high proportion of US wealth is held by investors under the age of 50, and that, according to various research reports, investors under 50 are “increasingly trusting and willing to pay for financial advice.” However, advisors must understand the habits and mindsets of younger investors and cater to their individual preferences, it adds.

2. “Build enterprise value” - Many firms are not worth what their owners think they’re worth and adding real value demands a change in mindset. This means that it is essential to build trust and relationships between clients and the firm as a whole, not just clients and individual advisors, SEI said.

3. “Recruit, train, and retain younger advisors” - This is “easier said than done,” especially considering that only 3 per cent of advisors are under the age of 30. In competing for the best young talent, SEI said firms must provide training, technology and a “great environment.”

4. “Create a next-gen education program” - According to SEI, younger investors are “hungry for information” and often rely on employers, friends or the internet to get it. To tap this opportunity, advisors should establish an education program to help the next generation understand and address the issues they will face as they inherit more wealth and manage larger estates, the firm said.

5. “Rethink standard operating procedures” - Advisors should examine all aspects of their businesses - including processes, client service, technology and transparency - to ensure they are ready to make necessary changes. “The ultimate goal of this process is to create a business that would make it possible for a potential buyer to take over with limited interruption,” SEI said.

6. “Manage wealth, not assets” - The firm said that those advisors who consider themselves “wealth managers” earn more money, have deeper relationships and build stronger practices than those who call themselves “financial advisors.” Accordingly, advisors shouldn’t limit their businesses to investment management, as a wider range of expertise will generate more opportunities to strengthen relationships, boost revenue and, ultimately, build the firm’s value.