Draw Up a Plan

Ironically, in this industry, retirement planning may be even more challenging, based on the fact that career satisfaction among independent financial planners is typically very high. When asked to define their personal mission versus their business vision, many financial planners identify them as one and the same. It is nearly impossible for some planners to separate themselves from their business. That may not be such a great thing–especially if it’s taken to an extreme. Retirement, for some, is simply too big of an identity loss.

While the turmoil of middlescence is swirling about, there is a flurry of activity related to the transition of the business that must be addressed as well.

The Business Perspective: Managing the Transition

Business owners who are independent financial planners have typically spent years nurturing business growth. The timing and economics of transitioning a business may have a great deal to do with the planner’s own financial security.

Remember, the planning industry is relatively new, as is the transitioning of financial planning practices. Few of us had a parent, much less a grandparent, who was a financial planner. Conversely, physicians and dentists, accountants, and lawyers all have generations of data and personal experience regarding the transfers of their practices. While data on transferring a financial planning practice has been accumulating, the process remains less defined than for those other professionals. In fact, a subsidiary industry has emerged to help independent planners with this process. Just look at FP Transitions or the specialized services of Moss Adams as cases in point.

This new industry is building the database of information on the succession of financial planning practices. What information does a planner need to sell a financial planning business? Value, multiples, differences associated with various business models, and geography are key factors to be considered. Baseline information is increasingly available through conferences and industry publications like this one.

Although the nuances of transitioning a particular practice are as many as there are practices, the basics relate to valuation (often reported as approximately one to two times gross of prior year, depending on whether the business is commission-based or fee-based); terms of payment (often reported as 20% to 40% down with a three- to four-year earn-out, depending on geography and business model); tax issues; and the facilitation of the negotiation process between buyer and seller.

Of course, there are numerous situations that can complicate the transition. Here are just a few suggestions for avoiding common transition pitfalls:

• Establish a clear timetable with your successor. Some planners jump the gun trying to hire a successor long before they are willing to give up an iota of control or discuss any specifics of how the transition might work with a successor. Often the successor believes (or assumes) that tangible ownership change will happen on a far different timetable than the planner assumes. The point? Be straight. Articulate exactly what you are thinking. If you have no idea when change might happen, think twice about whether you even want to bring it up when hiring a new staff member who may become your successor.
• Understand the difference between a continuity plan and an exit plan. Regardless of age, every planner needs a continuity plan because illness and accidents can strike anyone at any time. Retirement planning, however, is for those who are planning to exit or partially exit the business, now or later, according to some preplanned schedule. Within your own head and in your conversations with others, take care to clarify the distinction between a continuity plan and a retirement plan.
• Stay flexible when working with kin. Working with your grown children in a practice has its own unique set of potential complications. If one overlays the parenting role to an already complex and potentially stressful transition situation, some sticky questions are likely to surface: Do the kids really want to be in the business the same way Mom or Dad did? Are the kids cut out for this business? Is the transition fair to the kids? Is it fair to Mom or Dad? Even if the commitment remains while the younger person gets her planning degree and CFP, it’s still possible that the child could discover that she doesn’t love the business the way her parents did.

  But even if we acknowledge these nuances, could it be that the business transition process is not as complex as we make it out to be? Or that sometimes we make the business issues bigger than they really are? Could it be that we confuse business issues and personal issues? Do we drag our feet with the business issues because we haven’t clarified the personal issues? Where do you begin?

How to Prepare for Retirement

A planner’s retirement is inextricably tied up with both personal and business issues and can become a tangled mess, but here are a few tips I’ve learned over the years to help you prepare for your own retirement:

• Get credible information. Whether we are talking about the personal or the business perspective, make sure you get credible information. AARP is just one source of personal information. As boomers emerge into this life stage, the services available to support the personal transition process will increase. On the business side, use industry publications and conferences to get a sense of who has expertise in this area. Your local network of accountants and lawyers may not always be your best source of information. How many of them are intimately familiar with the transition of a financial planning practice? Look to those who have done it before and who have firsthand experience with the transition process within this industry. Your own broker/dealer or custodian may be a good source of information based on the nature and extent of value-added services it provides.
• Network with others going through the same process. Study groups are invaluable. Some of the really good ones can help participants with both personal and business issues associated with the transition process. Also, look to your broker/dealer, custodian, or industry group like FPA or NAPFA to provide opportunities to learn firsthand about planners who have successfully transitioned their practices and simultaneously made the life changes that allow them to continue to thrive. Expect to hear more panel discussions and case studies about the transition of practices at the conferences you attend.
• Start early. In a sense, planning for the sale of a practice begins when the practice is launched. The next generation of financial planning business owners is wise to the fact that nearly every decision made ultimately affects the value of the practice. Your niche, the number of households you service, your choice of compensation models, the operational efficiency your broker/dealer or other partner facilitates in your business, the records you keep, your compliance history, the profitability of your firm, and your staffing professionalism all affect the value of your practice.

  And don’t wait until after business succession occurs to start planning the personal side of things. That’s too late. Think about it: we ask our kids or grandkids, “What do you want to do when you grow up?” You should be asking yourself that same question throughout your adult life, too.

• Create written plans for both the personal and business transitions. On the business side, the outcome of the due diligence process, which entails gathering information and starting early, is the buy-sell agreement. Remember, however, because nearly every decision affects the value of the business, it is wise to consider adding succession preparation to your annual business planning process.

Create a written game plan on the personal side as well. Be somewhat playful about addressing what’s next, especially if you start early, as recommended. Consider different options. Self-employment in a new business, a bridge position or bridge career to move you to a new industry, pursuing nonprofit opportunities, partial retirement, full traditional retirement, or no form of retirement at all–these are just a few alternatives. Don’t slip into the old assumption that traditional retirement is right for everyone, and don’t let anyone make that assumption for you. Take control of your retirement, just as you have for your career up until retirement.

Remember the book What Color Is Your Parachute? First published in 1970 by Richard Nelson Bowles, many boomers used it to plan the growth of their careers. The book can be equally valuable in planning the next stage of your life. Perhaps that book should be renamed “What Color Is Your Parachute Now?” In any case, the book, which is updated annually, remains a great resource, providing a structured process for soul-searching and offering ways to clarify how to use your time going forward.

This industry provides financial planners with the enormous satisfaction that comes from helping others. As you think about your next move, remember that you are on concurrent tracks–personal and business–and that the timing of one affects the other. This industry may be somewhat unique in that it offers planners the option to continue full time in the profession, pursue a traditional retirement, and everything in between. A successful retirement is a personal and a business responsibility, as well as an enormous opportunity to be seized. Go for it!

Joni Youngwirth is VP of practice management for Commonwealth Financial Network, where she helps representatives build their businesses. Joni also sits on the Editorial Advisory Board of Solutions magazine, the practice management publication of the FPA. She can be reached at [email protected].