7 Succession Planning Pitfalls Financial Advisors Must Avoid

Here are seven common mistakes to avoid, along with tips for developing a successful succession strategy.

1. Starting Succession Planning Too Late

Succession planning is a process, not a one-time event. After dedicating decades to building your business, it's crucial to have a well-thought-out plan for what comes next. The earlier you begin, the more options and flexibility you will have.

Many financial advisors make the mistake of waiting until they’re ready to retire before starting the succession planning process. However, by starting early, you can identify potential successors, groom them for leadership roles, and ensure a smooth transition.

Early succession planning should also include getting an accurate valuation of your business, which can reveal potential wealth gaps or areas where the business's value could be enhanced before a transition. This insight gives you the time to implement strategies to improve profitability, optimize operations, and increase the business's market appeal to potential successors or buyers. By addressing these gaps early, you can ensure that the business is in the best possible position when the time comes for a transition.

Tip: It’s ideal to begin succession planning at least five to seven years before your intended retirement. If you’re planning to retire or exit your practice sooner, having an expert team on your side can help you navigate the ins and outs. Starting early gives you ample time to understand the value of your practice, optimize the timing of your transition to avoid selling after the peak, and maximize your monetization opportunities.

2. Focusing Solely on the Highest Payout

While financial compensation is important, several other elements should be considered as you plan your exit and monetization opportunity. Factors such as fit, culture, and client continuity are also important considerations in addition to monetary amounts. A well-matched successor can help ensure that your business thrives and that your clients continue to receive the support and guidance they deserve.

It's tempting to choose a successor based on the highest financial offer, but it’s crucial to consider the potential long-term implications. A successor who shares your values, understands your clients, and fits well with your team is more likely to maintain the quality and integrity of your business. This alignment ensures that the business's mission and culture are preserved, which is essential for sustained success.

Financial compensation is only one part of a successful succession plan. Equally important are cultural fit and the ability to maintain excellent client service. When planning for the future of your business, consider asking yourself key questions that will help guide your succession strategy.

What’s most important to your team? What do they need and want from the next generation of the practice? How should the current level of support and client experience be maintained or even improved in the future? Thinking through these questions will help you consider the big picture and ensure that your clients remain at the center of your business.

Tip: Evaluate potential successors based on a combination of financial terms, cultural fit, and their ability to continue your business's mission and values. Seek a balance that ensures both immediate and long-term success. This holistic approach will help you find the right fit and ensure a smooth and successful transition.

3. Leaving Your Team Behind

Succession isn’t a solo process. It’s essential to involve your team in the planning process, as their insights and support can be invaluable. By considering their perspectives and input, you can ensure that they’re aligned with the succession plan and are prepared to support the new leader. Their involvement can also help maintain a seamless client experience and foster a sense of continuity and stability.

However, it’s important to strike a balance in when you involve your team. Involving them too early can lead to misalignment between what you want and what they want. For example, the person you think would be a natural fit as your successor might have no interest in taking over the business. On the other hand, involving too many people too early can result in a loss of control over the narrative and create unnecessary confusion or anxiety.

By keeping your team informed and engaged throughout the planning process, you can build a cohesive and supportive environment that enhances the likelihood of a smooth and successful transition.

Tip: Hold regular meetings with your team to discuss succession planning. Gather their feedback and address any concerns they may have. Ensure they understand their roles and responsibilities during and after the transition. Don’t wait until you’ve finalized your plans to involve the team; transparency and ongoing communication are essential to maintaining trust and alignment.

4. Overlooking Client Impact

Clients are the foundation of your business. Once you have a plan in place, it’s essential to keep your clients informed and reassured throughout the process. A transparent and well-communicated transition can help maintain their loyalty and trust.

Your clients have built a relationship with you over the years, and they need to feel confident that their financial well-being will be protected during the transition. Clear and consistent communication is key to maintaining client trust. Keep them informed about the succession plan, introduce them to the new leader, and reassure them that their needs will continue to be met.

Tip: Develop a communication plan that includes regular updates to your clients. Hold informational meetings or webinars to introduce the successor and explain the transition process. Provide a clear timeline and address any concerns they may have.

5. Getting Lost in the Deal Terms

Focusing too much on the deal terms and structure can divert your attention from your long-term goals. When evaluating a deal and thinking about your terms in finding a buyer match, it is important to think about the “why” behind the terms.

For example, as a seller you may want a bigger downpayment, but can the buyers match the term? Are there other options in the proposed deal that could be beneficial that were not in your original consideration set? Trying to define deal terms ahead of discussions on goals and alignment with potential buyers can create frustration and potentially narrow opportunities.

Deal terms also mean more than just the potential monetary outcome. There are different types of structures for ownership transition. While the specific agreement and deal structure will depend on your situation, the most common methods can include:

• Outright purchase: The new practice owners obtain the clients from the former financial advisor’s book of business.
• Gradual buyout by a third party: The seller has an option to remain the majority owner, while gradually monetizing more of the practice’s value and ceding responsibility over time.
• Internal succession: Advisors typically choose a junior advisor to mentor within their business in preparation for their eventual takeover. It’s often chosen by practice owners who aren’t yet ready for retirement but want to take a proactive approach to the future transfer of their practice.

The deal terms are important, but they shouldn’t be the only focus. A well-structured deal can provide financial security, but it won't guarantee the ongoing success of your business.

Consider the broader implications of the succession plan, such as the impact on your clients, the stability of your team, and the long-term growth of your business. Similar to how you want to help your clients design a full financial plan, it is important to seek the help of experts in succession planning to design the ‘deal terms’ of your plan.

Tip: Take the time to find the right trusted partner to help consider your options and navigate potential tax and financial implications, without losing sight of your values, client needs, and the future of your team. For example, LPL has helped hundreds of advisors reach their succession goals leveraging industry expertise in succession matchmaking, business valuations, and deal consulting and more.

6. Asking the Wrong Questions (or None at All)

Many advisors tend to avoid difficult but necessary conversations or may rely on biased advice when it comes to finding the right buyer and structuring a deal. This can lead to agreements that look favorable on paper but cannot be executed or may not meet the overall objectives for your business. It’s important to ask the right questions and seek unbiased guidance. Engage with trusted mentors, peers, and professionals to ensure you’re making informed decisions.

Avoiding tough questions can result in a succession plan that doesn't address key issues. For example, you might not fully understand the successor's business philosophy or their plans for the future of your clients. Seeking unbiased advice from mentors, peers, and professionals can help you make more informed decisions and avoid potential pitfalls.

Tip: Think about all the facets of your business and what matters the most in your plan for your team and your clients, then prepare a list of critical questions to ask potential successors. These should cover their business philosophy, their plans for client service, and their vision for the future of your business just to name a few. And seek input from trusted advisors to ensure you’re asking the right questions.

7. Missing the Key Valuation Window

Timing is essential in succession planning. Holding out for "perfect" conditions can lead to missed opportunities to maximize value. Delaying too long may mean selling a declining business instead of a thriving one. It's important to be proactive and seize opportunities as they arise.

The value of your business can fluctuate based on market conditions, client relationships, and the overall health of your practice. There is never a perfect time to sell and you don’t want to be forced to sell, so planning can help you with your own terms and timeline. By being proactive, you can maximize the value of your business and ensure a better outcome for you and your clients.

Working with an expert for an accurate valuation can provide crucial insights and help you make strategic decisions, ensuring you monetize your business at the right time. Potential buyers prefer businesses with growing revenue projections over those in decline. As your client base ages, their lifetime value decreases, and assets under management tend to shrink. To maintain or increase your practice's value, aim to consistently attract younger clients and new assets.

Tip: Monitor the market and your business's performance regularly. Be prepared to act when the conditions are favorable, rather than waiting for an ideal but potentially unattainable scenario.

Putting it All Together

Whether you’re preparing your legacy plan, exploring ways to unlock the value of your life’s work, or are searching for a partner to guide you through this major life event, focus on succession with intention. You want a path that maximizes valuation, minimizes disruption, and honors the legacy you’ve built. By avoiding common pitfalls and following the tips provided, you can develop a robust succession plan that ensures the continued success and stability of your business.

LPL Financial Can Help

LPL is here to help you secure your legacy and exit on your terms. We can help you navigate the multiple options, answer your questions, and guide you on the path to find the solution that best fits your needs.