Protecting Your Legacy: 5 Succession Planning Strategies for Independent Advisors

Regardless of where you are in your life cycle as a business owner, it’s important to think about protecting the practice you’re currently building or preparing to sell a practice after years of putting in the hard work to make it successful. This means having a succession plan in place to protect your legacy.

Making your succession plan means more than simply deciding who will run your firm after you retire and move on to the next phase of your journey. It should be a thorough and well-documented resource that ensures the future of your practice, providing contingency plans for unforeseen circumstances while mitigating risk.

Don’t have a plan in place yet? Below are five strategies to help ensure you create a plan that protects your legacy and all those whom you have supported over the course of your career.

1. Understand Your Practice

Before identifying your continuity or succession partner, it’s important to understand the value of your practice from both a qualitative and a quantitative perspective.

• Mission statement. Do you know what your firm stands for? This doesn’t need to be anything formal, but you should have a clear understanding of how you would like your firm to be viewed.
• Annual business valuation and cash flow analysis. Ongoing awareness of the quantitative value of your practice can also help you plan for the future and understand where you can create value ahead of a final sale.
• Organizational structure. What are the key roles within your organization that help it function? How will your stepping away affect those roles?

2. Identify Your Ideal Partner

While it may be unrealistic to find someone who runs the business and client relationships just as you have, you should be able to outline what your needs and wants are to help you determine the right fit.

• What is the advisor’s current investment mix? Ensuring a similar investment mix to your own will provide your clients continuity from a financial advice perspective.
• What is their investment philosophy? Continuity and alignment of investment philosophy can have a significant impact on client retention and should be a factor in succession planning; clients typically prefer to be educated about new investment opportunities, but the unfamiliar can become overwhelming.
• If your clients prefer in-person meetings, is the advisor close enough to continue to foster those relationships? Although many people have moved to hybrid working environments, not all clients are comfortable with them. Make sure your successor understands the client’s needs and can meet them.
• Does their mission statement align with yours? Your (and their) mission statement can say a lot about how your clients will feel transitioning to a new advisor and about their ability to trust in their new advisor’s capabilities.
• Does the advisor have enough capacity to support your practice should they need to step in prior to retirement? Regardless of the size of your practice, taking on any book will require additional time and effort. Ensure your successor has the necessary resources to provide the level of service your clients are accustomed to.
• Do they have a succession plan on file? Having a plan protects you, your family, and your practice in the event that something happens to the acquiring advisor.

3. Craft Your Communication Strategy

A succession plan is only as good as your team’s ability to follow through on it. Therefore, it’s essential to share the details with anyone who may potentially be affected. This could include successors, key employees, family members, and even clients.

A solid succession plan can also be a selling point for existing and prospective clients, who may ask about how your firm will safeguard their finances if you become unavailable.

Think about how you plan to communicate this to your clients. A quarterly review is a great opportunity to let them know your contingency plans so they aren’t caught off guard by planned or unplanned events.

4. Make Routine Updates Ongoing Maintenance

A succession plan is not a set-it-and-forget-it document. You should evaluate your strategy as your business changes and grows, and update it as needed.

As a good rule of thumb, review your plan each year or as major events happen within your company. If your practice is rapidly growing or hiring, you may want to conduct reviews more often, to keep your succession plan aligned with the current scope of your business and personal goals.

5. Use Commonwealth’s Help

The do-it-yourself approach might work well for some tasks, but it’s often not the best method for succession planning. You should have support and guidance through the succession planning process. A coach or partner firm can help you with the following:

• Creating a holistic succession plan. Commonwealth can help ensure your formal plan spells out every detail, so your business will continue running smoothly in the event of a planned—or unplanned—transition. Commonwealth can also assist in identifying potential successors, preparing necessary documentation, and implementing strategies and timelines.
• Preparing for a sale or transfer. In case you intend to sell your business, Commonwealth can also assist in finding a buyer and conducting due diligence, as well as provide the necessary resources to value your practice. Planning to transfer ownership of your practice? Commonwealth can ensure the proper framework is in place and guide you through the entire process.
• Addressing the unique needs of a multiadvisor firm. If your business is a multiadvisor firm, establishing equity ownership may be useful. Such a structure increases the equity owners’ commitment to the success and profitability of the firm. When drafting your succession plan, ensure there’s a clear allocation of how many shares each advisor will receive, or be eligible to purchase, from a departing owner’s shares.

Building a Plan to Support Your Legacy

Your independent firm is your professional legacy. Therefore, getting your succession plan right is well worth the time.

Commonwealth can help you implement the strategies outlined above so your business can continue to prosper regardless of what happens in the future. We’ve helped many advisors design and execute effective succession plans. Contact us today to learn how we can help.

Please note that Commonwealth does not provide legal or tax advice and recommends consulting with an independent tax professional.