Succession planning for your wealth management practice

One-third of wealth managers plan to retire in the next 10 years, according to Practice Innovation Index (PII) data. Nearly half (44%) don’t have a succession plan in place.¹ While leading firms are strategically building programs to help wealth managers transition their practice or sunset their book, other firms lack a formalized process. They remain uncertain about the inevitable.

It's a rich irony that wealth managers help others prepare for retirement, yet some leave their practices unprepared for their own departure. Most wealth managers expect to retire soon after age 65, according to Cerulli Associates (Cerulli).² But many end up delaying or slowly transitioning out of the business. Senior wealth managers approaching retirement often find it hard to walk away from a practice they worked so hard to build. Locating the right successor and executing an equitable deal only heighten the emotional hurdle.

Procrastination can put an entire practice at risk. But the transition process doesn’t have to pose a danger. Wealth management firms that start 5-10 years in advance can, in our view, prioritize and be intentional about identifying and developing potential successors. With potential successors picked out early on, a succession plan may be formalized. Practices may create capacity, establish continuity, and prepare for the future transition of the business. We believe clearly communicating goals and expectations over a defined timeline is critical. A client-centric approach throughout the implementation process will likely help ensure a smooth transition.

Improving succession-planning strategies

Wealth managers have many succession options. These include training an internal successor to assume their book, joining forces with another practice, selling the practice to an external buyer, or, in some cases, selling the practice to their bank or broker-dealer. Which is right for you?

Each approach has important considerations that will likely impact the planning, execution, and timeline of an eventual succession plan. One-quarter (23%) of Practice Innovation Index respondents have identified an internal or external successor with established client relationships who is fully integrated into the team.³ An internal successor may need mentoring to establish new client relationships over time. An external successor, either through merger or sale, should be vetted to ensure they fit culturally and align with the value proposition and service offering.

With successor candidates earmarked, we believe outgoing leadership needs to provide them with a comprehensive view of the business and an opportunity to develop trust and rapport with clients. Clients will likely want to know their money remains in capable hands. Wealth managers need to work to ensure that clients are confident in new leadership, laying out specific expectations for the integration process and finding alignment on timing and responsibilities. A comprehensive plan – clearly communicated – may help ensure a seamless transition with clients as a wealth manager eases into retirement.

Tactical tip: Vetting potential successors should begin several years before a wealth manager nears retirement. Building trust, transferring affinity, and establishing loyalty take time, for both a wealth manager’s team and ultimately its clientele.

Overcoming potential succession hurdles

Many challenges are likely to arise during the succession-planning process. The difficulty of finding a qualified buyer, transferring clients to a new individual/firm, and accurately valuing a practice all make the list.

Cerulli found that addressing the emotional aspects of retiring and transitioning a business is a major challenge for nearly three-quarters (73%) of the wealth managers it surveyed.⁴ This makes perfect sense; wealth managers build businesses out of personal relationships and might hesitate to let go of those relationships out of fear that their successor may not provide the same dedication and care. 

A wealth manager should choose a successor who can connect with clients and continue the level of service they expect. A younger wealth manager may be that person if flagged early enough in the process. For a junior associate, a wealth management practice may offer a structured career path with ongoing mentorship and client exposure. They have the potential to gain an understanding of daily operations, strategic planning, and regulatory requirements. A teaming system may help them round out their experience. We have seen that the right talent can thrive in this environment. Learning under the watchful eye of a senior executive may foster greater trust and confidence with clients.

A younger successor may allow an owner to preserve their legacy once they eventually retire. The rising leader is likely a known entity brought along in the system they’ll take over. Traveling that same road may even help them extend the legacy. A junior wealth manager may be positioned to form relationships with clients’ children. That manager, in a leadership role, potentially becomes a top candidate to handle wealth when it passes to the next generation.

Centering the client in communication

Client communication is, in our view, key. The how and when of sharing a succession plan with clients are among the most important factors. Wealth managers need to connect with clients clearly and transparently throughout the retirement process, helping them understand all the client-oriented considerations that led to this choice of successor.

Proper positioning of a long-term integration and succession strategy may help preserve the client trust that undergirds this relationship. With a comfort level already established, clients are likely less tempted to move on from the practice during a transition. A successor’s early integration into the practice and exposure through client meetings may promote this familiarity.

We believe practice owners should reassure their clients that the high level of care, service, and expertise they receive will stay consistent. Communicating confidence in a successor’s skills and ability to run the practice may help ensure this continuity. With the practice set up for future success, practice owners have an opportunity to step back from day-to-day operations and eventually retire.

Conclusion

Executing a transition – from identifying successor candidates to training them, from ingratiating them with clients to passing the baton – can take years. Many wealth managers approaching retirement have not put a succession plan in place let alone started the process. Clients likely understand that retirement often follows a successful career. They likely just want to know their wealth will remain in good hands. Plan for the next stage of your life, just as you’re helping them plan for theirs.