Guide

The big benefit of having a succession plan

Two generations of industrial owners
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Having a blueprint for how your company will run if you or an important employee unexpectedly leaves is crucial — not only to your business, but to your clients.

"They told me I'd done a great job making myself less relevant to the firm — and that didn't hurt my feelings." -Ron Carson, CEO, Carson Wealth

"Regardless of what industry you're in, if you have clients and you're communicating a transition or succession plan to them, it lets them know that their relationship and the business is more important to you than just how you earn your living," said John Barnes, president and CEO of Pendleton Street Advisors, in a February interview.

A good time to walk a client through a succession plan is after you've built a solid foundation with them, Barnes said. Speaking about it too early could scare them, he noted, but once they build trust in you, they will likely appreciate it.

Financial advisor Ron Carson of Omaha, Nebraska, got a wake-up call about the importance of a succession gameplan more than 15 years ago. His firm, Carson Wealth Management, now has $6.4 billion in assets under advisement.

At the time, Carson posed a question to his advisory council of clients — a group he had previously organized to serve as consultants for the advisory practice he launched in 1987.

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"I asked them, 'If I died tomorrow, would [you] stay with my firm?' " he said in a 2014 interview. "All but one said they'd likely be gone within six months."

Carson began recruiting other advisors—his firm now has 73 advisors and 219 international stakeholders in his growing business, where he serves as CEO. Last year, when he asked his council the same question, all of them said they would likely stay.

"They told me I'd done a great job making myself less relevant to the firm — and that didn't hurt my feelings," he said.

Carson is a rarity in the registered investment advisor universe. Most of the trail-blazing financial advisors who hung out their shingles in the 1980s and '90s have remained solo practitioners.

They may have shifted the axis of the wealth management industry toward fiduciary, fee-based relationships, but without successors to fill their shoes, they risk seeing their small businesses dissolve when they retire.

Developing a succession plan is especially important in industries where clients rely on a business for important matters like handling finances and legal issues, as Carson's story reveals.

"We're starting to see it play out now as advisors lose big accounts," said Tom Nally, president of TD Ameritrade Institutional, which serves as a custodian for independent RIAs, in a 2014 interview. "Clients may not always ask about it, but they are thinking about it."

Increasingly, a good succession plan is a necessity for keeping existing clients and attracting new ones. "Advisors can't change the inevitable," Nally said.

"They need to live by the practices they preach," he added. "Clients want to work with someone doing the right things for their own legacy."

Eric Schwartz, CEO of Cambridge Investment Research, a broker-dealer for more than 2,800 independent advisors, said that the lack of long-term succession planning in the industry is already hurting some advisors.

"Most advisors get new clients from referrals, and people are less willing to refer someone to a 62-year-old advisor without a succession plan," he told CNBC in 2014. "We don't have numbers on this, but those advisors will get less referrals."

The flip side of the succession question for RIAs is the opportunity it creates for those advisors who invest the time and effort to build out their businesses beyond themselves.

A succession plan provides a long-term vision for the business and motivates younger advisors and employees to help the firm succeed. It also assures clients — both existing and new — that they won't be left in the lurch if something happens to the firm's founder.

"The advisors who have a good succession plan in place realize the value of it," Schwartz said. "It can be an offensive tool."

Cambridge Investment Group created Continuity Partners Group, a special purpose broker-dealer focused on assisting advisors in drafting good succession plans, even helping to finance deals between senior advisors and their successors. Schwartz said that members of ContinuityPartners Group are reaping the benefits.

"Our partners are able to tell their clients that they have a structure behind them," he said. "The average CPG member is growing faster than other advisors we work with."

Carson can attest to the value of a succession plan that motivates employees and provides clients with peace of mind. He expects that most solo practitioners don't have the energy and wherewithal to undertake the effort and that larger firms like his own will have a competitive edge in a coming shakeout in the industry.

"It's natural that investors want to know how they're going to be impacted if the founder of the firm dies" or retires, Carson said. "A succession plan provides a huge marketing advantage."

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