Internal Succession Planning: 5 Key Steps

• Develop internal successors with effective talent acquisition and mentorship strategies.
• Plan for a minimum of five years to complete the transition.
• Overcome internal buyers’ lack of capital with longer-term financing or earn-out provisions.

Within the next 10 years, 37.5% of advisors are expected to transition,¹ yet 26% don’t know what their succession plan is.² While it can be difficult to navigate practice ownership transition plans, one common approach — internal succession — is worth considering.

When comparing internal succession to a direct sale, merger, or acquisition, internal succession often results in a higher degree of continuity for clients and staff. It also offers the advisory owner the flexibility to either fully retire or maintain a limited role.

But identifying and developing a successor can be challenging, and it’s a decision that has significant implications for all involved, from the advisory owner and the chosen successor to staff and clients.

Failure to effectively identify and develop a successor could result in a less-than-suitable match, putting client relationships, the future prosperity of the business, and your own transition plans at risk.

To orchestrate a successful handover, it’s important to understand what it takes to effectively develop an internal successor and what a potential timeline for internal succession might look like.

Is an Internal Succession Strategy Right for You?

Hiring and training team members through the lens of succession is among the most important challenges advisory owners face. Believing internal succession to be the more straightforward option, owners frequently opt for internal candidates over external ones.

In fact, 44.6% of advisors plan to sell or transition their business to a partner, junior advisor, or family member upon retirement.³ And in the next 10 years, 41.5% of all industry assets are expected to transition (Figure 2).⁴

As you explore potential successors, consider their leadership qualities and financial readiness to determine the best path forward for you and your business. While an internal successor offers a high degree of continuity for clients and staff due to their first-hand knowledge of the business and familiarity with clients, the perfect internal candidate to lead the practice forward doesn’t always exist. Or, your preferred successor may lack the necessary capital to buy the practice on your desired timeline.

This is where taking a team-based approach to managing human capital can help build continuity well ahead of a business transition — by promoting a shared sense of ownership over client relationships. To help ensure your team development efforts are effective, assess the following questions:

• Is your process for people development strategic and intentional?
• Are you making the right introductions for potential successors to clients and centers of influence?
• Are you building your team members’ skill sets for long-term success?
• Are you considering their career goals and timelines?

Timeline for Internal Succession

Of all the transition options, internal succession requires the longest runway. It takes time to identify and develop a successor, which is why we recommend a minimum of five years to see this option through.

An adequate timeline also allows you to develop more than one team member, to reduce the risks associated with choosing just one person as successor.

Years 1 – 2

• Set personal objectives and determine which succession strategy suits your firm.
• Seek an objective practice valuation — then optimize your business structure to address areas of weakness.
• Identify internal successor(s): An advisor's ability to prioritize clients’ best interests (93%), establish strong chemistry with current clients (87%), and demonstrate a compatible personality (80%) are all crucial factors in successor evaluation.⁵

Years 3 – 5+

• Structure and execute on your succession plan, with an emphasis on client retention and recruitment of next-generation advisors and investors.
• Include work processes, both business branding and head advisor branding, and team building with an emphasis on client retention and recruitment of next-generation advisors and investors.
• Finalize the transition.

5 Keys To a Seamless Internal Transition

1. It’s never too early to start planning.
   Internal succession requires a longer runway — up to 10 years before your planned exit. It’s also wise to consider more than one viable option. Planning early allows you the time to source, develop, and mentor young advisor talent and to consider financing options. When assessing successors, start with the end in mind. Define the vision for ongoing practice development and what long-term success looks like.
2. Internal buyers often lack capital, but this doesn’t have to be a dealbreaker.
   Consider longer-term financing or an earn-out provision. Many modern deals include an earn-out which provides the selling advisor a monetary incentive based on achieving specific client retention. It emphasizes the importance of managing the client experience and actively managing practice value through factors like healthy organic growth rates, cash flow, and client age — not just gross revenue.
3. Actively evolve your succession plan.
   Once clear on your transition needs, focus on talent acquisition. Many advisors discover they need to change course along the way, realizing that their first choice for an internal successor isn’t the best choice in the long-term.
4. Include the eventual successor(s) in client relationships far in advance of an expected retirement.
   Sourcing, developing, and mentoring young advisor talent to become potential successors requires an intentional approach and a commitment to investing in their careers. Adding younger advisory talent to your practice can position the business to attract and retain a younger client base, generating higher growth rates to balance clients in the decumulation phase of their financial journey and diversifying assets under management — a driver of practice valuation.
5. Ensure clients will have continuity in services, as well as in investment management and product selection.

A successful transition requires advisory owners to willingly relinquish control and emotionally prepare. In other words, they must overcome “Founder’s Syndrome,”⁶ or the challenges entrepreneurs can face in moving on from their business due to fear, issues of control, decision-making, and emotional attachment to the business they created. That said, the lead-up to retirement can also be an exciting time for advisory owners, especially when preparing to transition your business to a trusted internal successor.

Some advisors put decades into building a business, only to initiate the succession planning process too late. With careful planning and a well-defined timeline, you can confidently make choices to maximize the value of your practice and ensure continuity for your clients and longevity for your business.