Few financial professionals are fully prepared for succession, with an overwhelming 81 per cent of advisors claiming the industry does not do a good job helping with succession planning, according to a new survey.

Few financial professionals are fully prepared for succession, with an overwhelming 81 per cent of advisors claiming the industry does not do a good job helping with succession planning, according to a new survey conducted by Mathew Greenwald and Associates for Signator Investors.

The survey revealed that only 11 per cent have completed a succession plan, while around a third have started, but not completed, a plan (34 per cent). Meanwhile, 44 per cent said they've thought about making a plan but not actually started. An additional 12 per cent haven't even started thinking about creating a succession plan and only one in ten has an "excellent estimate" of the value of their practice (10 per cent), though 33 per cent have what they consider to be a "good estimate." Over four in ten say they have some sense of the value of their practice, but not a good estimate (44 per cent), and an additional 12 per cent say they do not have any idea of how much their practice is worth.

"Overall, I think the industry has been active in discussing this issue and developing programs for advisors to help them with succession planning, but clearly the need to do more continues," said Brian Heapps, president of John Hancock Financial Network, parent of broker-dealer Signator Investors.

"Personally I can see that advisors might consider a succession event to be too far into the future to consider. However, it's never too early to work on the critical first steps of obtaining a solid valuation for a practice and then considering how best to increase the value and build equity," said Heapps.

The topic of succession planning was recently discussed by Family Wealth Report in an interview with Rick Flynn, principal-in-charge of the family office group at Rothstein Kass about single family offices citing succession planning as their top challenge in Family Wealth Alliance’s 2012 annual study of the sector, revealing that only 38 per cent of SFOs have created a succession plan to replace the chief executive or top officer.  

The Signator Investors survey suggests that some of the advisors' hesitation in planning comes from not knowing how they want to retire from their practice. The survey showed that only 20 per cent are very certain about what they will do with their practice when they retire, though it appears few plan to retire all at once.  Many plan to reduce their practice activities before they retire (52 per cent), and 42 per cent currently have a plan in place to continue working with key clients (another 45 per cent say they intend to create a plan to continue working with key clients). 

Most either have a protégé now (30 per cent) or are likely to hire one in the future (among those who do not have a protégé, 67 per cent plan to hire one). Sharing a philosophy with the protégé and working with them for a number of years are key considerations in hiring someone to take over their practice (important to 96 and 94 per cent of advisors, respectively).

Lack of knowledge

Signator Investors said that many advisors do not feel knowledgeable about the aspects of succession planning they consider to be most important. This includes finding a successor, important to 85 per cent of respondents, with 41 per cent not feeling knowledgeable about it; obtaining a valuation of an investment business, which 83 per cent feel is important, and 42 per cent not knowledgeable; valuation of a fee-based business (72 per cent, 49 per cent); access to financing (71 per cent, 60 per cent); valuation of an insurance business (66 per cent, 56 per cent); and arranging third-party management of the transition (57 per cent, 71 per cent). At least seven out of ten responding advisors consider each of those issues to be a challenge for them.

Advisors surveyed by Signator Investors cited a number of concerns in succession planning, including obtaining cash for their business (80 per cent), maintaining relationships with key clients (70 per cent), financing a transition (69 per cent), annuitizing their business (69 per cent), and bringing along a younger rep (66 per cent). 

Additionally, client service is also a consideration, as 56 per cent of advisors list leaving clients with a lower level of service as a concern, and another 47 per cent agree that they do not believe they will be able to find someone who will service their clients as well as they do. 

Conducted by Mathew Greenwald & Associates online, the survey represents responses from more than 500 financial professionals who were working either as a career agent, IFP/IFA, or independent broker-dealer rep, planned to retire within 20 years, and had worked in the financial services industry for at least five years, owned at least half of their practice and generated at least $80,000 in gross income in the 12 months prior to the study.