If you’re like many other boomer advisors approaching age 60, planning for a graceful exit from your practice is probably a low priority right now. Why mull over an event that’s not due to happen for another five or 10 years, you might ask, when you have so many other tasks to attend to?
Think again. Succession planning–transitioning your clientele to a new advisor over a period of years as you prepare to leave the business–is possibly the most important activity you can undertake now to assure yourself a financially rewarding retirement. The earlier you start the planning, the greater are your chances of a making a trouble-free exit.
“Exit planning takes a lot of time and effort,” says John Brown, CEO of Business Enterprise Institute, Inc., Golden, Colo. “The departing advisor has to cultivate a strong and deep rapport with a younger prot?g? who will gradually assume more importance in the client relationships. If you wait until age 65 to begin a succession plan, then it’s probably too late.”
Lisa Van Zandt, a director of succession planning at AXA Equitable Life Insurance Company, New York, agrees, adding: “The exit plan should take place over an extended period of time. If clients aren’t transitioned appropriately–if the successor advisor hasn’t developed good working relationships with them–they could become dissatisfied and take their business to another company.”
How far in advance of retirement should one start the planning? Depending on the number of clients to be serviced and the complexity of the practice, experts say, one should start at least three to five years before the expected date of departure.
One Long Transition Plan
Or, if you’re like Carl Polhemus, a financial representative for Northwestern Mutual-Denver, an affiliate of Milwaukee-based Northwestern Mutual Financial Network, make that 10 years.
A 30-year industry veteran, Polhemus started transitioning about 950 of 1,000 clients to a younger prot?g? five years ago. Each month, he would review with the junior advisor the files of about 20 clients. Thereafter he would send the clients a letter indicating the associate had joined his team and would be calling on them to assess current financial needs.
Had he not undertaken the years-long planning, says the now 64-year-old Polhemus, he would have been unable to meet his current objective: dedicating his last five years in the business to transitioning 50 high net worth clients to a seasoned wealth manager. At retirement, the task of reassigning the less valuable 950 clients to other NMFN producers would have fallen to someone who has no knowledge about the clients’ planning needs.
“One client might make $1.5 million annually, be worth $50 million and have sophisticated planning needs, whereas another may earn only $50,000 per year working for the government and have no additional needs,” says Polhemus. “You don’t necessarily want the same producer meeting with these two people.”
The varying financial needs of clients likewise factored into Polhemus’ exit planning strategy. The 50 people he’s keeping–among them affluent business owners and executives who collectively account for about a third of his lifetime sales production–met three criteria he established for segmenting his clientele: (1) He enjoys working with them; (2) they value his expertise; and (3) they have significant revenue potential.
“Because of these clients’ long-term potential, I feel like I’m giving them a promotion by introducing them to [the wealth manager],” says Polhemus. “I think they’ll like his model better than mine because it’s more comprehensive.”
Keeping it all in the Firm
While all has so far worked out smoothly, Polhemus acknowledges that he undertook a “seat-of-the-pants” approach to his exit planning. Other firms allow little room for such improvisation.
Case-in-point: Rogers Group Financial. Fifteen years ago, the 38-year-old firm, based in Vancouver, B.C., instituted formal procedures for transitioning ownership and management of the firm from one generation of principals to the next. Among other requirements, says Clay Gillespie, a managing director for the firm, each of the 14 partners must annually sell back to the firm 10% of their shares in the business starting at 60 and concluding at age 70.
t retirement, the exiting advisor cedes the partner title to a successor who has been groomed through an “articling” program the company established for new advisors. While under the tutelage of a senior advisor, says Gillespie, the junior associate is expected to meet several requirements. Among them: joining client meetings with the mentoring partner; pursuing coursework leading to an educational designation (such as the CLU, ChFC or CFP marks); and demonstrating an ability to bring new business to the firm.
Those who can–informally dubbed “finders”–are the cream of the crop. Not everyone enrolled in the articling program, observes Gillespie, becomes a partner. Other new advisors who lack the requisite prospecting and sales skills–”minders” (those capable of servicing clients); and “grinders” (individuals suitable for back-office work)–may still have a place in the practice, albeit below the partner level.
“At our firm, there is room for some minders and grinders, but to be a partner, we want finders,” says Gillespie. “We’re not a huge firm. So we have to be sure all of the partners are pulling their weight by expanding the business.”
And, he adds, the worth of the individual practices. By keeping the clientele in transition wedded to the firm, says Gillespie, the exiting advisor’s book of business has greater value than it would have if the practice were sold to an outside advisor. The reason: Clients are less likely to bolt if the servicing of their portfolios remains within the company.
Gillespie says the financial component of the hand-over varies from one practice to the next. Some partners prefer an “earn-out” in which they garner a share (say, 25%) of recurring fees and trailing commissions earned by the successor advisor. In other cases, the incoming partner buys the practice with a bank loan, then funds the loan repayments from ongoing fees.