It is an incontrovertible fact that the average age of the financial advisor community is rising every year. According to a recent Moss Adams report, the average age of an investment professional today is 52 years old. In five years, that average age will increase to approximately 57 years. And yet, even as financial advisors are looked upon to provide retirement insights and planning to their aging clients, it is remarkable how little thought they give to their own retirements — or how they will prepare their businesses for it.
The good news is that succession planning is becoming a part of the recruiting process. Most major brokerage firms offer to assist in structuring succession plans, locating potential “purchasers” and facilitating the payments that are made to the retiring advisor. This is to their advantage for obvious reasons: By fostering internal succession, firms are positioning themselves to retain a departing advisor's assets.
In fact, one of the most common reasons an advisor chooses to change firms these days is an inability to find a suitable junior partner in his current office at his present firm. Exploring competing firms can multiply an advisor's successor prospects.
But it can also allow an advisor to essentially “cash out” twice before packing it in. He “cashes out” a first time when he receives his transition package for switching to a new firm, and cashes out again a few years later when he leaves the business. Usually the advisor will agree to remain at the new firm for a finite period (perhaps four or five years) during which time he structures a sell-off of his book to his younger protégé.
Take Sid, a 32-year veteran of a large West Coast wirehouse. Sid was in partnership with his 34-year-old son, Barry. Together the father-and-son duo was producing $2.2 million in revenue on $245 million under management. Sid, who was in his early 60s, had approximately $140,000 in non-vested deferred compensation, and the only succession planning he had done was bringing his son into the business eight years earlier. Sid wanted to work less, and was contemplating retirement, but was concerned that his son did not yet possess the necessary resources to succeed on his own. Sid was also a “hands-on” advisor who was very much in touch with all of his clients — and he worried that if he were to retire, they would not remain loyal to Barry.
Primarily a money manager, Barry was more technically proficient than his father. He had assembled a team consisting of two assistants and a rookie advisor just out of the training program. Barry still wanted his dad to be involved with the business, fostering relationships and interacting with clients, but he wanted him to be able to slow down and enjoy life more. Unfortunately, Barry didn't have the wherewithal to pay his father for his business interest. Suddenly, he began to notice the size and scope of the deals some of his colleagues were receiving for moving to other firms. After some exploration, Barry learned that he and his father could literally move across the street to an equally solid firm and receive a deal equaling 230 percent of their production.
Moreover, while both would have to sign a nine-year promissory note, Sid would only have to agree to remain in the business for five more years, and at that time, he would pay taxes on only about 44 percent of his total transition package. Further, Barry would now have ample resources to buy out his father's interest in the business. Sid and Barry made their move in February of this year.
Having some form of exit strategy in place is far superior to the all-too-common “do-nothing” alternative, where an advisor lets his fate control him rather than the other way around. Remember, it's not a sprint to the finish line — it's a marathon. Be prepared for all contingencies so that you can collect the grand prize awaiting you at the end.
Writer's BIO: Mindy Diamond
founded Chester, N.J.-based Diamond Consultants, which specializes in retail brokerage and banking recruiting.