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Selling Your Book of Business: Top Three Considerations

The number of advisors who plan to sell their books of business will accelerate in the coming years. Don't complicate things by not having a succession plan.

Though the financial services industry has undergone a wave of head-turning transformations in recent years, spurred on, in part, by a mix of demographic trends, the looming threat of robo platforms and the increasingly complex regulatory environment, one issue remains as relevant today as it was 10 years ago: succession planning.

That succession planning continues to demand attention shouldn’t be a surprise. After all, the above shifts simply reinforce its significance. Indeed, the aging advisor class, online solutions that make investing more turnkey and a steady stream of new rules and regulations each put extra competitive pressures on both large and small practices – which, in theory, should make having a well-defined exit strategy even more of a priority.

But as we all know, what should happen in theory and what actually does happen in reality often clash. Despite the emphasis on succession planning of late, especially among broker-dealers, the media and industry thought leaders, an alarming number of advisors still don’t have one in place.

Make no mistake: Every advisor needs some sort of succession plan. And since this typically involves selling your book of business to another advisor, here are the three most important things to think about as you begin to formulate your plan:

1. The potential tax penalties of staying in the wirehouse space. For starters, consider that a wirehouse advisor typically receives a payout equal to their trailing 12-month production from their employer at retirement. That contrasts with a retiring independent advisor, who can usually get around twice that amount when they sell their book of business on the open market.

If that weren’t enough, now weigh how the IRS treats each one of these transactions: A wirehouse payout is treated as ordinary income, while the sale proceeds from an independent advisors' book of business get mostly capital gains treatment. Given the spread between the top marginal rate (39.5 percent) and the capital gains rate (20 percent), the tax implications of retiring in the captive environment versus the independent space can be significant.

This is how that would play out in real life: A wirehouse advisor who is a $1 million revenue producer, upon retirement, would receive a one-time payout of roughly the same amount. After taxes, that nets out at about $600,000. The same advisor in the independent space, however, would keep about $1.6 million – thanks to the fact that they can leverage the free market to get a fairer representation of what their book is worth (roughly twice the valuation) and the manner in which the IRS treats that sale.

2. Aligning with a quality advisor or team of advisors who will continue to build your business. Look for a buyer or succession plan partner who will not blow up your book of business. This has a couple different components. On one hand, it will ensure that your clients will continue to receive the service and attention they need after you depart the space, a point of concern for many advisors who want to leave behind a strong professional legacy. On the other, it will help to preserve any trailing revenue streams that are part of the deal, since, obviously, no one will pay you for relationships that no longer exist.

Maybe this means bringing in a junior partner to groom over the course of five years. That would provide ample time for both the new advisor and your clients to become comfortable with one another. Or perhaps it’s selling the book to a large team of well-resourced advisors. Not only are such teams able to better support client transitions, but this approach offers added protection against the possibility that your buyer dies or decides to leave the business. It’s never a bad idea to insulate yourself against all contingencies.

3. Don’t wait until the last minute. Sometimes advisors suddenly decide they want to retire. Other times they want to change careers. And in some circumstances, retiring advisors are just woefully unprepared. Whatever the case, impulsive decisions such as this are typically very costly, ending with advisors having to unload their books at a deeply discounted rate.

To extract as much value out of your book as possible, be prepared to stick around for at least a year. It takes about three to six months to have at least two in-person meetings with recently acquired clients – the first one is led by you and serves as a basic get-to-know-you gathering, while the second, spearheaded by the buyer, digs a little deeper in an attempt to build a better rapport. 

Then, the next six months are all about making those newly developed relationships stick, and that’s why it makes sense to have a seller stay on to answer any questions or concerns that may arise. You, in effect, act as consultants during this time, and, of course, earn a payout for that role.

The number of advisors who plan to leave the space and sell their books of business will likely only accelerate in the coming years. This is often a long, complicated and arduous process for even well seasoned, experienced professionals who have a succession plan. Don’t further complicate things by not having one.    

Steven Dudash is the president of IHT Wealth Management, an LPL-affiliated Super OSJ based in Chicago that collectively manages over $600 million.

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