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Advisors with no succession plan can kiss their clients good-bye

Fifteen years ago, financial advisor Ron 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.

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

Alistair Berg | Digital Vision | Getty Images

It was a wake-up call for the certified financial planner, whose firm, Carson Wealth Management, now has $4.3 billion in assets under advisement.

Carson began recruiting other advisors—his firm now has 13, including three recently hired advisers in their 20s—and adding more than 100 staff to help deal with 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.

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"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.

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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.

Many advisors are already starting to feel the pinch as existing clients fret about the future and potential new clients balk at signing on with aging entrepreneurs who have no successors.

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"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. "Clients may not always ask about it, but they are thinking about it."

Succession planning isn't just about entrepreneurs realizing value for the businesses they've built. It's about ensuring that clients' needs are met and that the practice can remain an ongoing business after its founder has retired.

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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 2,500 independent advisors, said that the lack of long-term succession planning in the industry is already hobbling advisory practices.

"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 said. "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.

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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."

"It's natural that investors want to know how they're going to be impacted if the founder of the firm dies. A succession plan provides a huge marketing advantage." -Ron Carson, founder and CEO, Carson Wealth Management

Cambridge has created a subsidiary to help its advisors draft good succession plans, even helping to finance deals between senior advisors and their successors. Schwartz said that members of Cambridge's Continuity Partners 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.

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"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."