How to make a succession plan a success

Financial advisors are adamant that their clients must have a retirement plan, so why aren’t they following their own advice?  

That’s a question George Hartman, founder of practice management consulting firm Ultimate Practice and CEO of Market Logics Inc. in Toronto, finds himself asking often.  

Hartman, an industry veteran with nearly five decades of experience in financial services, has coached hundreds of advisors on succession planning. He says most advisors don’t have a plan, and when they do, they don’t always give it much thought. 

“They would never allow their clients to get themselves into that situation and not plan their retirement,” Hartman said.  

According to data from Investment Executive’s 2024 Brokerage Report Card and 2024 Dealers’ Report Card, just 46% of 1,074 advisors surveyed in the brokerage and dealer space had documented business succession plans last year. Another 20–23% said they had begun planning a succession as either a retiring or succeeding advisor, but some of those advisors said that they lacked resources, guidance and/or advisor connections.  

Is it time to retire? 

Start with a simple question: Am I ready to retire?  

There are multiple dimensions to that question, Hartman explained.  

The first is financial. Typically, soon-to-retire advisors will ask themselves whether they’ve accumulated enough wealth to fund the retirement lifestyle they want.  

“Many, regrettably, have not done as good a job accumulating wealth for themselves as they have for their clients, and so they’re counting on the sale of that practice to fund at least part of their retirement lifestyle,” Hartman said.  

The second is emotional — which is often overlooked. Advisors need to consider whether they’re ready to let go of their practice. 

“It’s pretty hard to walk away from a business that you spent 25, 30, 35, 40 years in many cases building,’” Hartman said.  

“Many advisors are defined by their business. I’ve had 86-year-olds in my program who are trying to figure out how to get out of the business. But they can’t let go, because at that age, they’ve lost a spouse, their clients are their friends, their whole social network is tied up with their client base.”  

On the flip side, is the business ready to hand off? That comes down to whether the advisor has found the right successor and knows how they’re going to exit. 

Advisors have the option of leaving abruptly or gradually, transferring their books of business to another advisor at their firm, or mentoring their replacement, Hartman said. “There’s lots of ways to do it, so they need to figure out which one makes the most sense to them.” 

Hartman said advisors should begin their business ventures with the end in mind, a reference to Stephen Covey’s The 7 Habits of Highly Effective People. In other words, set goals and make decisions along the way with a view of maximizing the value of the business and making it saleable. 

“So, even though your retirement or exit might be 15 or 20 years away, decisions you make today set it up so it has the best chance of success when you do transition,” he said. “The longer the runway, the more strategic you can be.” 

Hartman refers to plans that are five to 10 years long as a “strategy of inspiration.” If a plan is three to five years long, Hartman calls it a “strategy of perspiration, because there’s a lot of work to do.” A one to two-year plan, in his eyes, is a “strategy of desperation.” And if a plan is carried out in less than a year, it’s a “strategy of hallucination.”   

Selecting a successor  

Many advisors underestimate the complexity of succession planning. Hartman noted that the key issue veteran advisors have is finding a good successor. Even if they find one, it typically takes six to 12 months to make sure they’re the right fit, bring them into the business, ensure they’re oriented and introduce them to clients.  

“You could sit down and, in an hour, write out a plan,” he said. “But is it going to be the right plan? Is it going to be thought through carefully enough? Have you thought about the resources you require and the time commitment to get them?” 

It helps to know your potential successor and what their investment philosophy is, Hartman said. Internal candidates are typically less disruptive to clients than bringing in a candidate from outside of your firm.  

But if you know the successor too well, you may be tempted to treat the process too casually, Hartman said.  

Advisors in these cases may make the mistake of assuming their successor will maintain the legacy of the practice without gauging whether their successor is cut out for the job and/or signing a formal agreement.  

For example, a father may deem their son or daughter fit to take over their practice, without giving them a test run or even asking whether they want to take on this level of responsibility. 

“It’s kind of every entrepreneur’s dream to have their child take over their business, but it brings special challenges into consideration,” Hartman said, “like, [is the child] feeling entitled? Or do they feel obligated?” 

To get a better sense of whether a potential successor fits the bill, bring them into meetings to observe how they interact with clients. This will also ensure that clients are mentally prepared for a transition, making them more likely to stick around.  

Reassure your clients 

Client communication is a significant part of any succession plan.  

Advisors need to be upfront about the fact that they have a plan and reassure their clients that they’re choosing a successor “very carefully,” ensuring the successor has the same values, principles and will manage clients’ financial affairs in a similar manner, Hartman said.  

Otherwise, clients will be left wondering what will happen once their advisor chooses to retire. Or worse, they could be gearing up to switch advisors. 

In a “good” transition, advisors will retain some 95% of their clients, Hartman said. 

“Some clients will use a change in advisors as a reason to change firms because their nephews have gotten into the business, or their neighbours are chirping at them over the backyard about what a good advisor they’ve got, or whatever,” Hartman said.  

“Most clients are pretty loyal if you’ve treated them well, and if you say to them, ‘Look, I really have your best interest at heart here. I’m choosing carefully to make sure that I have the right person for you.’”  

It’s also worth reassuring and communicating with your team so that they’re prepared for the change. 

Seek out support 

It’s not uncommon for departing advisors to have three or four false succession plan starts, Hartman said. 

In some cases, advisors may even express remorse after a succession happens because they waited too long to plan the transition, sold their practice too soon, didn’t pick the right successor or didn’t prepare their clients, he added. 

Advisors who are uncertain of how to carry out a succession should seek out support, Hartman recommended, whether it be a formal outlet at their firm, or by consulting a coach or mentor.   

Having a plan that allows for some flexibility is worthwhile, Hartman said. “The rewards will be huge. The payout will be substantial. You’ll have a more valuable business, which means you can enjoy a better retirement. You’ll be confident that your clients are well taken care of.”