Wealth managers like to explain to clients why succession planning matters, but they must practice what they preach.

Call it the Great Disconnect: there appears to be some serious misalignment between aging founders of advisory firms (G1) and the second generation of younger wealth managers working for them (G2) when it comes to succession planning.

Founders are dragging their feet and reluctant to relinquish control –  and equity  –  causing potential successors to become increasingly frustrated and willing to leave the firm if succession plans aren’t implemented, according to a new study commissioned by wealth management firm Kestra Holdings, Succession Misalignment Between G1 and G2 Advisors.

Only 6 (!) per cent of founders planning to retire in the next 10 years have a fully documented succession plan, according to a survey for the report conducted by research firm 8 Acre Perspective.

Not coincidentally, one in three second generation advisors are considering leaving their firm if founders don’t present a clear succession timeline. 

“G2 is really struggling with the uncertainty,” said John Amore, president of wealth management platform Kestra Financial, speaking at a press conference. “They’re ready to go somewhere else.”

Succession planning is an ever-present topic in wealth management in North America and much of the developed world. Trillions of dollars are in motion as Baby Boomers pass on. But the lessons don't just apply to end clients but to the men and women who advise on and manage the money. (See articles here and here.) There's an urgency – in 2023, J D Power said in a study that the average age of US financial advisors is 56, and 20 per cent of them are within five years of retirement. A recent Cerulli Associates report noted that nearly 40 per cent of financial advisors in the US plan to retire by 2030, with 26 per cent unsure of their succession plans.

Equity source of tension
Equity transfer is the biggest cause of misalignment between founders and potential successors, according to the study. 

One quarter of G2 advisors surveyed said they would consider leaving in the absence of receiving equity or a timeline for receiving equity, but only 22 per cent of G1s surveyed had documented financing sources in place for successors to purchase equity. Nearly one-third of owners said they hadn’t transferred equity because successors lacked sufficient funds to buy in.

Financing G2 equity is a “huge problem,” Pradeep Jayaraman, president of Bluespring, a Kestra company that buys RIAs, said. Ideally, founders should offer equity to successors at a discount, Jayaraman suggested. “That’s how we’ve seen most successful transitions between G1 and G2,” he said. “G2 needs equity, and they need help, but they should have to buy in so it’s not seen as an entitlement.”

Delays lead to frustration
Close to half of the founders surveyed said they’ve put off transferring equity because they want to wait until they’re closer to retirement, and 41 per cent said they were still assessing the fit of potential successors.

But waiting can alienate younger advisors, and the study urged founders to consider giving successors equity earlier, citing advantages including increased commitment and retention, accelerated leadership development and improved transparency and alignment.

In addition to equity transfer, the survey found that G1 and G2 are also at odds, to varying degrees, over the overall vision of the business, investment philosophy, HR policies and spending on advisor compensation, incentives, technology and practice management.

At odds
G1 founders cited difficulty finding qualified advisors who share their vision and values by far the biggest obstacle to making progress with succession planning. Other factors included lack of urgency, time involved to train potential successors, the expense of hiring qualified advisors and the fear of “being burned” by potential successors who leave for more money and poach clients.

There are also significant emotional hurdles for founders.

“It’s a loss of identity,” Amore said. “Founders are passionate about what they do and have a love of the game. That’s hard to give up.” Clients are also a factor. More than 40 per cent of founders said they were afraid their clients wouldn’t be taken care of as well if they left.

For their part, fewer than half of G2s believe that founders are truly prepared to retire and hand over leadership to them. They also said they were frustrated in not being able to take on more firm-wide leadership responsibilities, especially in areas like strategic planning and the financials of the business.

Making it work
Kestra executives cited Dallas-based CD Wealth Management One as an example of an RIA that has executed a successful leadership transition. After learning the business from the bottom up and being an advisor for eight years and then chief operating officer for five years, Ilona Friedman was promoted to be CD’s chief executive officer in February.

“I saw her talent right away,” the firm’s founder and executive chairman, Scott Cohen, said. Convinced that Friedman was ready for the top job, Cohen said he didn’t hesitate to put her in charge because he “didn’t want to lead the firm past my prime.”

Transparency and open dialogue were key to the process, Cohen said, citing the firm’s weekly meetings where financials are discussed with all staff members. “When I came into the office as CEO, I already knew what to do,” Friedman said.

Her advice to G2 advisors who want to get ahead: “If you know you want to grow with the firm and see a path ahead, don’t be afraid to ask for it and discuss it.”

The report’s bottom line for RIAs: “the risks of delaying transition planning are high. There’s risk to continuity of care for clients, risk of losing valuable talent and ultimately risk to firm value.”