As a financial adviser, you have spent your career helping clients to build and protect their wealth so they can retire comfortably and accomplish their bucket list items.
Ironically, it seems that many financial advisers have not taken their own advice, and instead of developing a transition plan to get themselves on the path to retirement, they retire in place. It sounds like a classic case of the cobbler’s children having no shoes.
When advisers retire in place, they will often stop working full time, go into the office less, and only communicate with clients when it’s convenient for them. This approach can negatively impact the level of advice they provide to clients, because they have one foot in retirement and one foot in the office. However, there are effective ways to retire in place, such as joining a firm that implements joint ventures or staged retirement plans for advisers.
An industry in crisis
According to a 2018 study by the Financial Planning Association and Janus Henderson Investors, 73% of financial advisers lack a formal succession plan. For smaller and solo firms, the lack of succession planning is more acute, with just 13% of advisers managing less than $50 million having a formal plan, compared with 60% of those at firms with $500 million or more in managed assets.
As the industry continues to literally age out, (there are currently more certified financial planners over the age of 70 than under 30), the lack of succession planning is reaching crisis levels. Add to this the fact that the industry is largely comprised of single-member financial advisory firms, and it is easy to see how clients could be adversely impacted as well. It seems the financial advisory industry is at a crossroads.
Plan for sudden departures
Many financial advisers enjoy what they do and have built a lifelong client portfolio with deep relationships and sound investment advice. Unfortunately, these same advisers consciously or unconsciously think that in order to provide continued care to clients, the only choices are to die at their desk or leave their clients in the hands of less experienced colleagues.
This philosophy can actually be detrimental to client care, as clients will be left in the lurch from any sudden departure of their financial advisers, whether it’s dying at your desk or being hit by a bus. Without a succession plan that ensures business continuity, everyone is at risk.
Developing a compliance issue
To make matters worse, there is current and pending legislation that requires financial advisers to have a business succession plan in place. In 2016, the Securities and Exchange Commission proposed a rule to mandate “business succession and transition plans” for the roughly 12,000 advisers (of the estimated 300,000 financial advisers) the agency oversees. This proposal is stalled and there is currently no federal law requiring advisers to have a succession plan in place. However, according to the North American Securities Administrators Association, at least 12 states require registered investment advisers to have business continuity and succession plans in place that minimize “service disruptions and client harm that could result from a sudden significant business disruption.”
New spin on succession planning
There are few options for financial advisers looking to wind down their practices or implement a business continuity plan. Some wirehouses do not allow their advisers to buy or sell books of business, choosing instead to offer incentives to retire in place, while the firm distributes their clients to other advisers — often without your input. Smaller advisory firms, such as RIAs, often pursue an internal transition plan with a team of next-generation advisers/owners — who are often family members — to sustain the business. But independent financial advisers often have no apparent path to transition the business. For these advisers, selling may be the best way to transition clients seamlessly while cashing out.
The good news is that monetizing your book doesn’t mean you must fully retire. Today, there are options to structure transition deals that allow advisers to monetize their book of business today and retire later. These are commonly called “sell-and-stay” or “sell-and-service” models, and they are growing in popularity. This exit strategy offers the most flexibility and freedom, and is ideal for both the older adviser poised for retirement and the younger adviser thinking ahead for the future.
In the sell-and-stay model, advisers sell their entire business to another financial advisory firm, but stay on in some capacity to service clients. This allows transitioning advisers to continue to work with their clients and earn an income without the obligations of business ownership. Today, there are even more options where an adviser can sell only part of his/her book, which affords the seller complete flexibility in his/her practice. Overall, sell-and-stay ensures business continuity for the client and sets the adviser on a path to retirement. In turn, buyers benefit from the former owners’ institutional knowledge and client relationships, which help increase client retention and improve the success of the transition.
Sell-and-stay can also be a good option for single-member practices where the senior adviser is approaching retirement or simply wants to wind down from the practice. Common situations well-suited for the sell-and-stay model include:
•●Gradual or immediate retirement
●• Preservation of business value
●• Adviser’s pursuit of an encore career or bucket list
●• Chronic health issues (for the adviser or a loved one)
●• Business continuity for the client
Finding the right fit is key
Recent studies report that 97% of all financial advisers say they will create a succession plan…at some point. Advisers cite the biggest obstacle in creating a plan is finding the right partner or successor.
A critical part of successfully transitioning a book is transitioning the client relationships. But, in most cases, clients are loyal to their trusted adviser, not the adviser’s business model or succession plan. Consequently, clients may not want to work with someone new. If they do not know and trust the successor, the clients will most likely leave and the seller will get less revenue for their book of business.
This means that sellers must look beyond monetary evaluations to find a buyer who will be the ideal successor for their clients. The most suitable buyer should share your investment and client service philosophies.
One of the most effective ways to transition clients is to handpick the best successors from a pool of well-trained, next-generation financial advisers. The seasoned adviser provides the successor with hands-on, personal mentoring tailored specifically to their clients. Together, the rising and retiring advisers take a tag-team approach to servicing the clients, until the senior adviser determines the right time (whether months or years) to hand off the client relationships to the successor. The older adviser has the opportunity to stay involved as much as s/he would like, while the successor gets sage advice from his/her elder and inherits a book of business.
Young advisers can benefit
With sell-and-stay, young advisers are well-situated to grow their business further after inheriting their elders’ books. They learn firsthand how to identify and meet client goals, as well as the dynamics of sound investment strategies and financial planning, and the nuances of client management. When done under the direction of a senior adviser who has gained a lifetime of knowledge and is vested in knowledge-sharing and client success, young financial advisers are well-equipped to develop additional clients of their own.
The bottom line
It is important to remember that succession planning is not an endgame strategy. With a good plan, the right people, and adequate time, retirement is possible. If you are one of the 50,000 baby boomer owner-advisers, it may be time to ponder that bucket list, then develop a succession plan that will make your dream retirement a reality, while properly ensuring business continuity for your clients after you are gone.
William McCance is president of Trust Advisory Group.