Michael Kitces writes about succession planning for financial advisors. His article begins as follows:

For years, industry commentators have been anticipating an “onslaught” of retiring baby boomer advisors who will begin to engage in succession planning en masse and sell their firms over the next decade. Yet year after year, the baby boomers get older, and the sellers don’t materialize; with an astonishing paucity of sellers to external buyers and an abundance of buyers, it remains a seller’s market for financial advisory firms.

Yet in a new book, David Grau (founder of FP Transitions, a firm that has potentially already been involved with more advisory firm sales than any other consultant or service provider in the industry today) makes the compelling case that for advisors to be focused on big headline external sales to third parties misses the real opportunity – an internal succession plan executed over a period of years or even a full decade, that ultimately delivers radically more to the founder than a third-party external sale ever could.

In order to harvest the greater long-term value from an effective succession plan, though, Grau points out that advisory firms are still too attached to the wirehouse-style “eat what you kill” revenue-based compensation, that simultaneously destroys value for the business owner and disincentivizes the next generation of owners from wanting to be successors in the first place. Instead, Grau suggests that firms need to shift from compensation based on top-line revenue to a greater focus on compensation built around bottom-line profits, that can ultimately help to both focus the business on maximizing its value, and truly incentivize the next generation of advisor owners to want to step up, buy in, and contribute towards – and be rewarded for – enhancing that long-term value.

via Effective Succession Planning For Financial Advisors And The Problems With Advisor Compensation Based On Revenue Sharing | Kitces.com.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.