The wealth management community has a massive next-gen talent gap, and it’s worsening every year. Wirehouse advisors with no obvious or natural successor are especially vulnerable, and it impacts their ability to monetize their life’s work when the appropriate time comes.
Such advisors face a unique dilemma as their career winds down: Who will “take them out?”
By “take out,” we mean two distinct but related functions: providing a monetization event for the senior (retiring advisor); and providing a succession plan whereby the clients can continue to be serviced with little to no interruption or friction.
Then how do advisors without such an obvious heir apparent reconcile this issue? Here are six possible ways and the pros and cons of each:
1. An arranged marriage: Since wirehouse sunset programs (aka retire-in-place programs) require a next-gen “inheritor,” the easiest solution for advisors in this position is to simply let firm management find a successor for them. There is likely no shortage of next-gen advisors who are hungry to take over a quality book.
Pros: This allows an advisor to walk the “path of least resistance.” It’s relatively risk-free and doesn’t require any transition risk.
Cons: Advisors in smaller markets may have difficulty finding a quality successor, even with the firm’s help. Larger advisors may not have palatable next-gen advisors available with the sophistication needed to service their books. Lastly, this move ties the retiring advisor’s legacy very onerously to their current firm.
2. Actively seek out next-gen: One issue advisors have with letting the firms find them a successor is that the firms are notoriously bad at doing so and not particularly proactive about it either. So, some advisors feel it’s incumbent on them to find an in-house successor themselves.
Pros: If they successfully find a quality successor, the advisor can enter into a sunset deal with their hand-picked successor as the recipient.
Cons: This is hard to do well. If it were easy, advisors wouldn’t be facing this challenge to begin with. Also, it usually means fishing in a limited pond (i.e., their current branch or complex, or maybe region).
3. Do nothing: Some advisors feel that the currently crafted retire-in-place programs are just too onerous for both the retiring and inheriting advisors. These advisors might run the business until they can’t or no longer want to and then walk away.
Pros: It’s liberating and certainly a way for an advisor to go out entirely on their own terms. Also, it requires the least amount of planning or work in advance.
Cons: This doesn’t allow the advisor to monetize in any way, shape, or form. They are basically walking away from their life’s work. Also, it doesn’t provide any sort of succession plan for clients, who would presumably be forced to pivot to a new advisor or firm.
4. Find an external successor: If there is no logical successor in-house, an advisor might look outside at other firms to see if they can compel or recruit another advisor to join their current firm. Often, the promise of inheriting/taking over a meaningful book is enough to make a prospective next-gen consider joining the firm.
Pros: Presumably, this gives advisors a much larger pond to fish in, and they can find someone with similar values and client service models. The next-gen advisor joining the firm gets a nice recruiting deal and becomes the successor to a book of business. The retiring advisor can now enter the firm’s sunset program.
Cons: It’s hard enough to identify a possible successor and harder still to convince them to move to their firm. As such, it likely takes longer than some other options on this list.
5. Change to a new W-2 firm: If the advisor doesn’t have a quality successor at their current firm, perhaps moving to another firm will enable them to find one. It’s essentially a new pond to fish in, and the onus of finding a successor is placed on the recruiting firm. An advisor who is being courted has real power. They can tell the new firm, “If you want to win my business, you must find me a quality successor before I walk in the door.”
Pros: This move allows advisors to “move once, monetize twice” since they will get a transition deal from the new firm and then can enter that firm’s retire-in-place program. Also, if an advisor has frustrations with their current firm, this move can have other positive side-effects—like improving client experience, technology, investment platform, etc.
Cons: This is a transition, and that comes with risk, friction, and potential portability issues. Also, it likely extends the sunset timeline by a bit. An advisor who wants to transition to a new firm and then retire in place is probably facing a 3- to 5-year window at a minimum before they can seriously consider stepping away.
6. Make the leap to independence, and then sell the business on the open market: This entails the greatest amount of effort but the most lucrative upside. After an advisor makes the leap to independence, they can sell their book at a significant multiple and for long-term capital gains treatment. The buying firm becomes the successor.
Pros: Besides the valuation premium and tax treatment benefits, this move allows for the most customization and flexibility with the “when and how” of the glide path to retirement. Wirehouse sunset deals are pretty rigid in what they allow in terms of timing, so these transactions present an attractive alternative for advisors who aren’t yet ready to choose their retirement date.
Cons: First, the advisor needs to transition to an independent model like an RIA, and then they can sell. As such, it requires more time, effort, and risk. Also, finding a buyer who is aligned culturally, philosophically, and otherwise can be challenging.
As these examples illustrate, there are no perfect avenues for an advisor without a successor to retire. That’s why it’s important to consider a solution early and often—even 10 or 20 years before retirement.
But even sole practitioners without next-gen have quality options—whether it’s within their current firm or not.