By Marlon Richards, Maria Lizak, and Marty Gunderson
It is inevitable that every advisor will leave the business one day due to career change, retirement, disability or death. Your own exit from the industry will either be voluntary in the case of a career change or retirement, or forced upon you because of a disability or death – either yours, or that of a loved one. Even though at least one of these scenarios is inevitable, if you are like the majority of Advisors, you have not figured out what kind of Succession Plan will work for you to deal with these life events. And even if you have given it some thought, you may not have prepared yourself or your business adequately enough to ensure a smooth transition for your clients in a way that maximizes the value of your business.
Retirement and Succession Planning
Many of today's Advisors are baby boomers that will all be looking forward to life after the ‘9 to 5’ in the next fifteen years. But retirement means different things to different people. For some, it involves sitting on a sun-drenched beach, drink in hand, drifting in the middle of the bay on a boat drowning in worms, or pursuing any number of passions outside their business interests. For me (Marlon), thoughts of retirement definitely involve more travel, more leisure time, and the ability to work on projects that have nothing to do with the world of business and finance. Some Advisors may never desire a formal retirement, opting instead to continue their work with clients, or to give back to the financial services community by spending more time teaching, coaching and mentoring younger Advisors. Or perhaps they will write a book, travel to conferences and speak, sharing their lifetime of experience and wisdom with their audiences. But there are two things most of today’s advisors share in common, whether they want to retire or not: the absolute need for a Succession Plan and the current lack of a well-defined and implemented Succession Plan.
Part of the difficulty is that we tend to view retirement and Succession Planning as synonymous, and if we are not ready to retire, we ignore the need to plan for this transition. Most Advisors are in their 60’s before they begin to give these issues much thought. Yet many things can happen to us in life that impact our business and its value, well before we get to the point where we want to retire.
Disability, Death and Succession Planning
As Financial Advisors, we know the statistics on disability and death, yet we fail to plan for their impact on our businesses. 1 in 3 people, on average, will be disabled for 90 days or more at least once before they reach age 65. If your business needs to be sold suddenly because you become severely disabled, or if you were to die suddenly and your spouse is left to sell the business, the value of your business drops dramatically. In these situations, you are not working from a position of strength. Urgency and quick actions ultimately discount the value of your practice, thereby negatively impacting your retirement plans and your loved ones’ security. In these circumstances, your business is generally worth only half of what it could have sold for, had the sale been planned strategically and you had the time to find the right buyer.
Therefore, it is importantto plan for disability and untimely death. Carrying your own critical illness, disability, long term care and life insurance ensures there is income replacement for you or your loved ones in case of any of these life events. Developing strong client engagement systems in your business, keeping excellent client records, and building multiple streams of passive income all help to increase the value of the business to you, as well as to a prospective buyer. A proper Succession Plan addresses all of these possibilities.
Stages of Change and Succession Planning
Another challenging aspect of Succession Planning is that we believe it to be a discrete event in a person’s life, something to be done only when we get to retirement age. In reality, retirement and Succession Planning are both processes of behavioural, emotional and mental change that we go through. Studies of change have found that people move through a series of stages when modifying their behavior: Pre-Contemplation, Contemplation, Preparation, Action and Maintenance.
Similar to other behavioural changes or transitions we choose to undertake (e.g. changing our diet, quitting smoking, or starting an exercise program), the processes of retirement and Succession Planning tend to follow these same stages. While the time a person can stay in each stage is variable, the tasks required to move to the next stage are not. Let us look at what is involved in each stage and learn how to move towards a putting into action a successful Succession Plan.
At the Pre-Contemplation stage, a person is not ready to make a change and is not planning on taking any action in the foreseeable future, either because they are un-informed or under-informed. People at this stage tend to avoid reading, talking, or thinking about their behaviours.
In the Contemplation Stage, people are not yet ready to take action, but they have begun to think about it and they weigh the pros and cons of making a change. This weighting between the costs and benefits of changing can produce profound ambivalence that can cause people to remain in this stage for long periods of time.
Preparation is the stage in which people intend to take action in the immediate future. Typically, they have already taken some significant action in the past year. These individuals have a plan of action, such as joining a health education class, consulting a counselor, talking to their physician, buying a self-help book, or relying on a self-change approach. These are the people who should be recruited for action-oriented programs.
Action is the stage in which people make the move for which they have been preparing. They make specific, overt changes in their behaviours and in their surroundings. This stage requires the greatest commitment of time and energy, but may be the shortest one. The overall process of behavior change often has been equated with action, but it is actually only one of six stages. After a person has taken action, they enter into the Maintenance stage. At this point, there may still be adjustments to the new lifestyle or situation. If the person has too much difficulty accepting the changes, they may relapse and revert back to a previous stage such as Contemplation or Preparation.
Although the Stages of Change model was developed specifically in the addictions and health and lifestyle arenas, the concepts can apply to processes like Succession Planning and retirement. Many advisors have no intention of retiring in the short term and are unaware of the importance of developing a Succession Plan. Another, perhaps larger, number of advisors are aware they should do something. But they are unsure of what they want to do and are still weighing the pros and cons of selling their book, cutting back on their client load, or taking on a Junior Advisor.
A growing number of Advisors are beginning to prepare for a transition by actively considering their options. Advisors in the action stage, may be putting up their practice for sale, or taking on a junior associate. They may have entered into an agreement with another Advisor or their MGA / Dealership on what would happen to their book in the case of disability, death, career change, or retirement.
Other Advisors are actively implementing a succession plan based on acquiring other books of business and implementing new systems and processes to increase the value of their book before a future planned transition or sale. A number of advisors have looked to grow their business by studying for their exempt market license so that they can offer private market alternatives to their existing clients and attract new clients who are unhappy with their current investments.
Taking Action on Succession Planning
Depending on the option you choose, you will have varying time frames within which to act decisively to make sure you can effectively create and execute a Succession Plan. As things change with your business, the economy, your industry and your life, you will want to get started as soon as possible to make sure you have at least a plan in place that will be flexible and adaptable enough to maintain until you are ready to implement the plan.
Unfortunately, most Advisors are too busy working IN their businesses, dealing with all the urgent issues that come up, like getting the next sale and or keeping up with product and regulatory changes. In order to move beyond merely thinking about creating a Succession Plan, it is important to step back on a monthly or quarterly basis to work ON your business, putting procedures in place to maximize the value of your business both for your retirement and for your estate. Look at your business as a separate entity, and think about how to maximize that business in ways both now and as a legacy.
This advice applies equally to all Financial Advisors, regardless of your license or specialty. Whether you are relatively new to the exempt market, or you have a long-established career in the private markets, there is value to the work you have done thus far, including the intangibles like your knowledge, your network and the systems and processes you have put in place. This value can be cemented, with a well-structured Succession Plan.
Begin now. To paraphrase Stephen Covey, it is never too early to begin with the end in mind. Think about what kind of lifestyle you would like to have when you are no longer actively working in your business and begin today. Then one day, you will be able to say, along with Frank Sinatra, “I’ve lived a life that’s full, I traveled each and every highway, and more, much more than this, I did it MY way.”
Additional Succession Planning Resources
Visit nbAdvantage.com to learn more about your options and what you can do to develop and implement your ideal Succession Plan, and read articles like The Myths of Succession Planning and Retirement - Why you should retire without Selling your Book. SobaBook.com offers resources for advisors to help them evaluate the current value of their book and increase the value of their business. They also assist advisors who are looking to sell their practice or expand their practice by purchasing a book of business.
About the Authors:
Marlon Richards is a member of National Best Financial Network, a group of independent insurance advisors and financial services professionals working collaboratively to empower advisors and their clients to succeed.. In an effort to understand the issues better, he has been interviewing advisors over the past year about their views on Succession Planning. Connect with Marlon on LinkedIn: https://ca.linkedin.com/pub/marlon-richards/24/84b/771
Maria Lizak, Ph.D., is co-founder and an Executive Business Director with National Best Financial Network. She is also a licensed Dealing Representative with Pinnacle Wealth Brokers, one of Canada’s largest Exempt Market Dealerships. Maria holds her doctorate in Clinical Psychology from the University of Saskatchewan, where she specialized in Sense of Community and Stages of Change. Connect with Maria on LinkedIn: https://ca.linkedin.com/pub/maria-lizak/22/5bb/9ab
Marty Gunderson is the founder of Sell or Buy a Book (www.SOBAbook.com). As an Advisor with many years experience in the financial services industry, he successfully transitioned his own practice a number of years ago. He is passionate about helping other advisors to take a long term view of their businesses and providing them with the succession tools they need to complete a successful transition. Connect with Marty on LinkedIn: https://ca.linkedin.com/in/martygunderson