In the latest installment of her series on transition planning, columnist Christine Timms asks: what should your successor bring to the table?
The most important step in transition planning is choosing the right successor for your clients and practice. Every successful financial advisor is a unique individual with a unique approach to running their practice. You need to find a successor who will be compatible with your clients’ expectations and needs. There are many potential attributes to consider when choosing your successor(s).
The clientele of a mature practice will likely reflect or be comfortable with the personality of the retiring advisor. Many studies have shown that clients stay with their advisor because they like them. If you don’t truly like the successor advisor, your clients probably won’t like them either.
Your successor should have, at least, all the industry qualifications you have. Any additional designations (Portfolio Manager, CFA®, CFP®, Life Insurance licence, option/derivatives licence, etc.) will add to your successor’s credibility in your clients’ eyes and may make up for what is likely to be less years of experience.
Clients need to believe your successor will be there for at least ten years after you leave. The successor must exhibit a level of personal maturity that clients will respect and be comfortable with regardless of the successor’s age.
A successor with less than 10 years’ experience should possess substantial compensating qualifications such as a previous professional career or a strong compatibility based on the other attributes listed in this column. The value of the potential successor’s years of experience should be measured by more than just years. How relevant is the experience to the investment strategy and services the successor is expected to provide to the retiree’s clients? An advisor whose experience is focused on stock picking and option strategies is likely not the best successor of a practice using a conservative, multi-manager managed money strategy even if they have over 10 years experience. Likewise, an advisor whose experience is focused on a conservative managed money strategy is likely not the best advisor to take over a practice with an investment strategy of stock picking and options. I also believe that more experience is preferable for a sophisticated clientele with complicated financial situations.
A pre-existing relationship with clients is best but not always possible.
The successor needs a large enough team to support the increased clientele. A successor’s ability to keep the exiting advisor’s existing team members will usually provide comfort to clients while they adjust to the loss of their trusted advisor.
Compatibility of successor’s business model
A retiring advisor needs to review the potential successor’s business model and compare it to the business model they believe will best suit their clients going forward. This is most easily done if both advisors have articulated their business model in detail (accomplished quickly through templates downloadable from www.christinetimms.com). Crucial areas of compatibility include:
Potential successor’s existing client base
Is the potential successor’s client base similar to yours? Similar walks of life, personalities, goals and expectations?
Your successor should be committed to continuing the past level and methods of contact with each client at least until that client and the successor advisor have established a new agreed upon approach to contact going forward.
Approach to investing
Will the successor advisor want to change all the investments? Will there be tax consequences for changes? Can you support those changes? It is possible that you believe a change in the approach to investing is warranted (discretionary management? using money managers? more global diversification?). The successor you choose should agree with your expectations of future needs and on the timing of transitioning the clients to any new approach to investing. The transition will be more effective if you, the retiring advisor, are present and fully supportive during the introduction to the new approach.
Use of financial plans
The successor advisor should continue providing whatever financial plans and estate planning services the referred clients received in the past and more if possible.
Approach to fees
How do your clients pay for your services? What do you think will be best going forward? The successor you choose should agree with your expectations of the future. You will need to agree on the timing of transitioning the clients to a new approach to fees. The transition will be more effective if you, the retiring advisor, are present and fully supportive during the introduction to a new approach.
Overall, the clients usually want to hear that the new advisor will be able to continue the services they are used to, with some potential improvements. The retiring advisor should fully endorse whatever changes the successor advisor plans to implement, helping to show clients how they will benefit from the successor’s approach.
Location in relation to clients
You can consider separating a group of clients located in another city from the rest of the clientele and choosing a different successor advisor located in that city. I would give those clients a choice as some of them might prefer having an advisor in a different city for privacy reasons.
Your successor must be able to fund the group referral compensation through their pre-existing practice and wealth, or through the income from the referred clients. The successor’s personal finances should be able to withstand some loss of revenue from the referred clientele. A successor will have difficulty focusing on the clients if they are facing personal financial difficulty. The ultimate failure of a transition contract occurs when the successor leaves the business because the practice fails to support the successor’s lifestyle.
It will be difficult to find a successor who scores high in all these attributes. To determine who will serve your clients best in the long term you will need to weigh priorities as you compare and evaluate potential successors. The free download, Potential Successor(s) Evaluation worksheet, from my website should help.
My next article will review steps 8 to 18 of the 18-step process that will help financial advisors organize their transition plan in advance of their retirement. These steps occur after choosing a successor when the chosen successor becomes more involved.
Christine Timms is the author of three Handbooks for the Professional Financial Advisor including “Transitioning Clients and the Retirement Exit Decision” (available in paperback, ebook and audiobook). Her website, christinetimms.com, provides descriptions and testimonials, as well as written and audio versions of the introductions of each book.