TRANSITION TALK

Business succession from parent to child is an age-old practice in human history, from humble cobblers to royal families. The practice stemmed from necessity—parents taught their children the trade they knew in an effort to teach them to survive. What started from necessity became custom and, eventually, tradition. In many professions, this tradition is still a point of pride. Advisory business owners will often see this as the best path to build an enduring practice and retain their client base.

For some advisors, the idea of passing the business to a family member is their preferred choice and seems to be the easiest path forward. One day, the founder steps out and the child steps in. Most advisors even consider gifting their business to their children, with or without a written contract, rather than selling it to them. Here are some simple reasons you should think twice before taking this route.

The IRS Considers Your Business to Have Value

Many advisors think, “I’ll just give my children the business when I’m ready to retire.” We hear this all the time from founding owners whose children work with them in their business. Be wary, though – although certain types of gifts are exempt from this rule, generally speaking, a gift whose value exceeds the annual exclusion is taxable to the giver of the gift and likely will be applied against the giver’s lifetime estate tax exemption. 

In many professions and in most businesses, succession planning and sustainability are not pressing issues. Most people don’t need a multi-generational dentist office, for instance. Who really cares if the neighborhood hamburger stand or your favorite restaurant has a succession plan? But in the financial services and wealth management industry it’s different.

Advisory clients have a clear–and not unreasonable–expectation of receiving continuing advice and investment management tailored to the length of their lives, not to the length of their advisor’s career. Being an independent financial professional necessarily indicates a commitment to the future; the element of planning implies that a financial advisor is starting something that will not and should not end with his or her own career. 

Consider the average successful financial advisor is in his or her mid-50’s. At that age, the owner/advisor will likely continue to work for another 15 to 20 years, even as time in the office gradually diminishes over the last half of that plan. At this time, clients are transitioning into retirement and are likely to need more financial guidance, not less. The term “succession gap” refers to the time difference between a single financial advisor’s career length and a client’s wealth cycle.

In the past month it seemed like our inboxes and Twitter feeds exploded with articles on “robo advisors.” Not necessarily a new technology, these automated platforms are setting off some threat alarms in the financial services industry.

It seems robo-advising can’t be avoided, which shouldn’t come as a surprise in our world of evolving technology and “gotta have the next big thing,” “how can I get the most bang for my buck” mentalities.

I dove into as many of these articles as I could in order to compile a list of the ones I think offer the best insight into the rise of robos and how traditional advisors can meet the challenges they pose head on.