Financial Advisors: The Time to Plan For Retirement is Now

In a new guidance document, the Financial Industry Regulatory Authority (FINRA) sent a stark warning, urging member firms and representatives to form their succession plans as soon as possible. Although it’s not mandated in any FINRA rule, firms are required to have business continuity plans in place — but that may not be enough.

According to FINRA, since the COVID-19 pandemic set in, a major demographic shift has left firms vulnerable to quick transitions that they simply cannot handle. The pace of retirement has accelerated tenfold in the last few years. Still, 16% of all registered representatives are 60 years of age or older, and 12% are over 65, which leaves firms at risk of unanticipated leadership changes. If firms don’t pay heed, practices will age out, leaving the next generation of advisors in the dust.

For years, reps have been telling their clients that it’s never too early to start planning for their retirement. But when it comes to making plans for the future of their own firms, they frequently fall short of putting any plans into action.

Now more than ever, it’s critically important for financial advisors to get started on their retirement plan — sooner rather than later. Developing and communicating the details of a succession plan not only gives clients the confidence of knowing they will be taken care of — it also increases the value of the firm to potential future buyers. Succession planning has always been an important issue for FINRA. But in light of recent events, FINRA is urging member firms and representatives to form their succession plans promptly.

The Importance Of Succession Planning

Those who do not have an adequate succession plan in place may be unaware of the depth of their vulnerability. The compliance risks associated with not having a succession plan are numerous. 

  • First, client attrition can increase when clients do not have confidence in a firm’s long-term stability. 
  • Second, failing to plan for succession can lead to problems with recruiting and retaining employees, as well as difficulty attracting new investors. 
  • Third, not having a succession plan in place can make it difficult to obtain the financing and capital necessary for business expansion. 
  • Finally, if a firm is unable to continue operating without its founder or principal owner, due to an unexpected illness or death, it may be forced to close its doors entirely. 

How To Choose A Successor 

When it comes time to choose a successor, it is important to have a clear idea of the skills and characteristics that you are seeking. Ideally, your chosen candidate will share your values and vision and will be able to lead the company in the same direction. If you are not able to find someone with the right qualifications internally, you may need to consider external succession plans. 

Internal Successions

First, identify the key individuals within your firm who would be integral to its continued success. These are the people whom you can trust to take over your business in the event that you become unable or unwilling to continue working. This might include employees who have been with your firm for many years or individuals who have shown steady leadership qualities. 

If you already have someone selected, AdvisorLaw has vast experience in coordinating strategies, conducting due diligence, and drafting enforceable agreements that are in line with regulators and firm policies and that protect you.

External Successions

For many organizations, succession planning is seen as a way to ensure that there is a pipeline of internal talent that can be promoted into key leadership roles. While this is certainly an important part of succession planning, it is not the only aspect to consider. External succession planning — that is, identifying and developing talent from outside the organization — can provide a number of benefits. For example, external succession planning can help to refresh the perspectives and ideas within an organization, and it can also provide a wider pool of talent from which to choose when filling key roles. In today’s ever-changing business environment, external succession planning can be a critical tool for ensuring organizational success.

If this winds up being your path, your first step is to begin conducting in-depth interviews and reference checks. This will help you get a better sense of each candidate’s qualifications and determine whether they would be a good fit for the role. Spend time with the partners of a potential firm to get to know them and feel comfortable with them. Make sure their core values align with yours. As your clients have become like family, you want to be able to introduce them to your new firm with confidence. 

AdvisorLaw’s Practice Purchase Network (PPN) offers the opportunity to compare your options. Our PPN is filled with respectable firms all over the country — of all shapes and sizes — that are interested in growing through acquisition or succession.

The advisor or firm with which you enter into a continuity plan will likely be the one who ends up purchasing your relationships when you are ready to retire — without necessitating a doomsday scenario. These agreements are revocable, so you can switch, transition, or sell elsewhere while you continue working.

Communicating With Staff And Clients During The Succession Process

During the succession process, it’s important to communicate openly and honestly with both employees and clients. Employees should be kept up-to-date on what is happening so that there is no confusion or misinformation circulated throughout the company. When communicating with clients, it’s important to have a plan and strategy mapped out beforehand so that you can present a confident and professional front. As employees and clients are both integral parts of any business, it’s important to treat them with respect throughout the succession process. 

The Bottom Line 

All financial advisory firms should have a succession plan in place. Such plans provide continuity for clients and increase the value of your firm. They provide the peace of mind of knowing that fruits of your hard work will be protected, even after you retire. 

Succession planning is an ongoing process that should be reviewed and updated regularly as your business evolves. Additionally, while succession planning is often thought of as something that only applies to small businesses or family-owned businesses, it’s actually just as important for large and publicly-held companies. 

Regardless of the size or structure of your firm, if you haven’t already started thinking about succession planning, now is the time to begin developing your succession plan.

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