Succession Planning

Forward-looking advisory firms groom young successors early on

Earlier this year, James Ludwick, a 67-year-old certified financial planner, sold the Odenton, Maryland-based advisory firm he founded more than a decade ago. His clients have hardly noticed.

That's because Ludwick sold the fee-only practice, MainStreet Financial Planning, to his younger partner and longtime protégé, Anna Sergunina, a 31-year-old certified financial planner who essentially got her start at the firm in 2006 as a paraplanner and administrative assistant.

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Rather than slip quietly into retirement, Ludwick still travels among the firm's five offices to meet with clients, although technically he now works for his former employee.

"I am so addicted to this business that I can't turn off my email," quipped Ludwick, who entered the financial services industry in 1988 after retiring from the U.S. Air Force. "Anna has been around long enough that the transition in ownership was smooth."

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Although Ludwick still works, he has managed to pave the way to a graceful exit by training his own successor. As the financial advisory profession continues to gray, thousands of other planners will be seeking to do the same in the coming years.

Many advisors are, like Ludwick, baby boomers who joined the relatively new planning profession after careers in other industries. According to a report by consulting firm Accenture, the average age of financial advisors is about 50, and 21 percent of the workforce is now over 60.

Research firm Cerulli Associates estimates that about 8,600 advisors will reach retirement age each year during the next 13 years. According to Cerulli, advisors generally expect to retire at age 68, but some 24,000 of them are already older than that and remain in the workforce.

When advisors do retire, they generally sell their businesses to other firms or to an internal successor. Alternately, they may refer clients to competitors. Ideally, their former clients find themselves in the hands of someone with the same approach to investing and client service.

However, many planners haven't even bothered to create formal succession plans, which is ironic, given that a fair number of them specialize in succession planning for businesses. Only a quarter of all advisors have a formal succession plan, according to a report by the Financial Planning Association.

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Among advisors ages 60 to 64, about 31 percent have a succession plan. Of the planners over age 65, some 41 percent have a succession plan, according to the report, which is based on the findings of a survey of more than 2,400 advisors and other industry professionals.

Many older advisors don't have a formal succession plan, because they don't expect to retire anytime soon, explained Valerie Porter, a Denver, Colorado-based certified financial planner who serves as director of practitioner services for the Financial Planning Association.

Often, veteran planners have labored long and hard to build successful practices. Rather than hand the keys to someone else, many figure they'll simply reduce their hours as they age and, for those who charge a percentage of assets under management, continue to collect a steady stream of income.

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Trouble is, life doesn't always go according to plan, said Porter, who once "inherited" the clients of a fellow planner in his early 60s who met an untimely death. Because the deceased didn't have a succession plan, his family wasn't compensated for the equity he had in his business, she said.

"If something happens and you don't just ride off into the sunset at a certain time in your life, you are putting your family and clients at potential risk" by failing to have a succession plan, she added.

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Porter and others in the profession say it behooves consumers to ask their advisors, or planners they may be evaluating, about their succession plans. Understanding what happens to the clients of a practice if an advisor retires or dies is equally important as knowing how an advisor is compensated, she said.

"It is not unreasonable for consumers to ask about succession or contingency plans," Porter said. "If enough clients start asking about these issues, it will speed up the process of advisors" taking the succession-planning issue more seriously, she added.

Advisors who have, or hope to groom, their own successors by mentoring young talent say there are a number of reasons to do so. Among other things, interns or recent college graduates tend to be less set in their ways professionally than older workers who come to the profession from other fields, although retaining upstarts once they get some experience can be a challenge.

Newbie advisors are usually integrated into existing practices slowly, giving existing clients time to get to know them. In the beginning, they generally perform "back office" duties and may do some financial planning and investment analysis. As they gain confidence and experience, junior advisors will play a more active role in managing client relationships and landing new clients.

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Planners who have worked under veteran advisors say the experience not only taught them how to run a business but also schooled them in the softer side of the profession—in other words, the interpersonal skills that are critical to cultivating client relationships.

"I basically started off as a person who was just in client meetings to take notes, and now I am running my own meetings and assisting some of our other advisors as they transition to more of a client-relationship role," said Jessica Bokhart, a senior financial planner at Market Street Wealth Management Advisors.

Being 22 years old after college and a female, I wondered how many people would trust me ... to manage their lifetime savings.
Jessica Bokhart
senior financial planner at Market Street Wealth Management Advisors

Bokhart was the firm's first employee when she was hired in 2006 fresh out of Purdue University, where she earned a bachelor's in financial counseling and planning. Bokhart, a certified financial planner, said the firm's managing director, Kevin Ervin, also a certified financial planner, made it clear to her from the beginning that she is a candidate to succeed him.

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"It has been very helpful to start from the bottom and work my way up," said Bokhart. She said she never seriously considered taking a post-college sales-oriented job at a big brokerage or insurance company, which is how many advisors get their start.

"Being 22 years old after college and a female, I wondered how many people would trust me back then to manage their lifetime savings," she recalled.

Young advisors need guidance

As the financial planner workforce dwindles due to retirement, attrition and recent cutbacks at big financial services firms, more advisory practices are expected to place an emphasis on cultivating homegrown talent. In the brokerage world, that differs from the usual practice of wooing advisors from rival firms.

Ultimately, the shift is likely to benefit consumers, said Craig Pfeiffer, chief executive officer of Advisors Ahead, a 2-year-old professional development program that, among other things, places college students in financial planning internships and recent graduates in residency-like positions.

In the financial advisory business, said Pfeiffer, planners have long had to learn through trial and error rather than by observing successful colleagues in action. But in other sectors, such as education, medicine and law, those who are new to the profession are required to gain some real-life experience by training under experienced counterparts.

"So why are we letting people manage money and advise clients just because they can pass the test for a professional designation?" he said.—A.R.