The Analyst interviewed Eric Leeper, vice-president of research and analysis at FP Transitions, to find out.

What is FP Transitions, and what is your role at the firm?

FP Transitions provides equity management, valuation, and succession planning services for the financial services industry in North America. Based in Oregon, the 30-plus person firm supports the annual transition of more than $20 billion in assets from current business owners and founders to next-generation advisors. I currently oversee new product development, financial modelling, and benchmarking, as well as many other analytical issues that financial professionals face today. We focus on systematic business transition, and sustainable wealth management and advisory practices.

What one issue is currently facing the wealth management industry in North America?

Aging demographics. Today, top advisors have around 10 to 15 years of experience in the industry, with an average of $50 million to $65 million of assets under management and advisory. The average age of advisors is 58. However, as advisors are getting older, there aren’t a lot of young professionals entering this field, further complicating the issue.

How does this issue relate to succession planning?

In today’s environment, attrition is the most common trajectory for advisory firms. Too many advisors are working for as long as they possibly can and then finally stepping away from their businesses without a plan as they head into retirement. Eighty percent of the industry currently have no succession plan for after their departure. Many advisors are simply assuming they’ll work into perpetuity, which isn’t a practical mindset to have in the interest of continuity of their businesses. The challenge is to create and build robust, sustainable firms; they don’t simply emerge.

What’s the importance of sustainability in the wealth management industry?

It’s important to plan for the continuation of a wealth management business beyond the longevity of the founder’s career. In all relationships between wealth managers and clients, there’s an implied covenant that the firm will be around to execute clients’ long-term plans. Unfortunately, many businesses aren’t capable of this, even though they believe it’s possible. In order to create a sustainable firm, the business must have multi-generational owners and be value-driven and equity-centric.

What are your views on the future of the wealth management industry? How do you see the issue of fewer young people entering the field being addressed?

The wealth management industry has been in a structural transition for a number of years. Most noticeably, advisory practices are moving away from commission-based models into fee-based advisory businesses. The recent Department of Labor legislation has accelerated this change in the U.S.; however, other countries such as Australia and Great Britain have already adopted similar regulations. This has a couple of apparent impacts on the industry. Most prominently, compensation models are being rethought to reflect this new form of client engagement, and roles and responsibilities within these firms are changing in reaction to a more complex investment and wealth management landscape.

Advisors are also facing challenges from a personnel standpoint—if young talent is not properly engaged, recruited, and trained, then advisors’ practices are at risk of being consolidated to firms that have these elements. In fact, we view consolidation as a major factor in addressing succession issues for advisors—if you have no one selected to take over operations and client relationships, then the most logical step is to find a much larger and more integrated firm to assume these duties. A succession plan forms a sustainable base for addressing this problem, and offers strong incentives for talented advisors to stay with their practices.

What’s your strategy for educating advisors about the importance of implementing a succession plan and building a sustainable business across generations?

The most important part of educating advisors about succession issues is to remove the notion that a succession plan is about retiring. The benefit of a properly structured succession plan really has little to do with actual succession. It’s about building a stronger, more robust platform for meeting the needs of clients for generations to come.

It also involves centralizing the value of the client relationship to the firm so it can be invested in and built upon. Without a team of next-generation advisors who are qualified and empowered to manage a client base that’s growing in size and complexity, the advisory practice is subject to the energy of the practice owner—which, over time, will decrease until retirement.

Properly structuring a business creates a sustainable platform that works for both the business owners and the clients, and is far more durable than the single-owner model that’s so prevalent in the wealth management industry today. Therefore, succession, as a concept, is an outcome of a properly structured business rather than a single transaction. Advisors must start early in the planning process to maximize their options when it comes to business structuring and succession. All too often we hear that advisors started too late in their planning process, which greatly limits their options for passing on the business.

How would you advise wealth managers to communicate succession plans with their clients, and what should advisors keep in mind for managing client relationships into the future?

Communicating the plan for your advisory practice should be something that’s reviewed with clients regularly. It’s far easier to explain to clients that you’re bringing on young talent to assist in the management of their plans than it is to explain to them you’ll be retiring on a certain date. These types of internal transitions to a younger generation over a long period of time result in lower client attrition and a better overall client experience. We also know that clients’ ages tend to be centred around the age of the advisor; thus, a multi-generation workforce inside of your practice can open up additional opportunities for client engagement, retention, and growth.