The average age of financial advisers in the U.S. has climbed north of 50, and more than 40 percent of advisers are now between 55 and 60. With so many advisers nearing retirement, the industry is facing a crisis when it comes to succession planning.
Typically, when the owner of a financial advisory practice wishes to retire, they’re faced with two choices: They can sell to an institutional buyer, private-equity firm or regional buyer, or they can gradually transition the business to a junior partner.
Many owners prefer to transition their book of business to a junior partner over a five- to 10-year period. However, throughout my career helping small-business owners transfer ownership of their firm and retire, I have found that financial planners have poor track records when planning and executing an ownership transfer.
Here are six tips to guide you through the transition of ownership of your business.
Don’t delay. It’s never too early to start the succession planning process, which can take more than a decade to finish. It takes years to introduce a new partner and provide them with the training and resources necessary to keep the business afloat.
Too often, I see advisers continue to work into their senior years only to realize they have no exit strategy in place. Consider your clients; who will take care of them after you leave? And how will you monetize the business you’ve worked to build over the course of a lifetime?
Involve your partner. Get them involved in discussions and meetings with your larger, more significant clients throughout the transition process. Junior partners are typically brought on initially to handle an adviser’s smaller accounts, and while this is fine in the beginning, it doesn’t give them the proper experience and training required to serve the bigger clients — which will be one of their primary responsibilities once ownership is transferred.
Think about culture. Don’t forget about such intangibles as management style, likability and cultural fit. Some financial advisers still run a very formal shop with pressed white shirts and systemized client communication techniques. Others are more comfortable in khakis and a polo shirt, and prefer a more casual style of correspondence with clients.
How does your new partner fit with your other employees? Making sure you two see eye to eye in these categories can smooth out the transition process for yourself and your clients.
Go over the financials. Not only must you teach the new partner how to handle your clients, you must also teach them how to run a business. What size client is most profitable? How does the business manage its costs? How do we manage the staff?
Many new business owners overlook these extra responsibilities, which can be overwhelming at first. But as the outgoing partner, you need to make sure the business is left in a position to remain profitable. Typically, selling advisers are paid out in installments. If the business fails, these payments could stop, leaving you in a sticky situation.
Get help. Hire a team of lawyers, accountants and even a management consultant to delegate the distribution of responsibilities throughout the process. Incoming owners often try to take over responsibility at a faster pace than the retiring adviser is comfortable with. Management consultants go a long way in easing this tension.
Finally, be open to change. Relinquishing your power and watching the business you spent years creating change in front of your eyes can be a difficult pill to swallow. However, standing in the way of the new adviser’s vision will only muddy the process. You must accept that some aspects of your business are going to change under new ownership. The sooner you come to terms with this, the better.
No matter how much you plan, transitioning your business will almost surely come with a few bumps in the road. However, many of your clients have worked with you for decades, and you owe it to them to ensure their financial futures are maintained.
The first step in doing so is to make sure your business is taken care of after you’re gone. So take this transition process seriously — and start early. Your clients’ well-being depends on it.
Stephen Brubaker is a wealth management adviser at Exit & Retirement Strategies in Centennial, Colo. This story was first published on the Financial Planning Association’s Practice Management Blog on Nov. 9, 2017, and was reprinted with permission.