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Is the Advisor Succession Crisis Just a Mirage? The Implications

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In the first part of our post on whether the advisor succession crisis is just a mirage, we discussed how many advisors, aided by technology and prompted by market performance, are delaying their retirement. In this second part, we’ll discuss the implications of this trend, as well as run through a few alternatives for exit strategies.

The Real Exit Time

While many advisors like the idea of “dying with their boots on,” the reality is that it’s not possible to delay an exit from the business indefinitely–at some point, it becomes impossible to meet with clients at all, whether due to being disabled by a sudden or deteriorating health event, or due to death. Unfortunately, though, as many advisors continue to remain active in the business right up until that point, it creates an especially problematic scenario: a sudden loss of a key person to the business, which can destroy the value of the business as an asset for a surviving spouse or heirs … not to mention leaving clients abandoned with no continuity or support!

Accordingly, for many planners succession planning for their business is actually about trying to plan for an ultimate and potentially untimely exit from their financial planning practices. It’s not really about a sale of the business at retirement, but an exit sale due to death or disability, whenever that may be. Unfortunately, though, the unknown timeline for when death or disability may strike makes the process of pure exit planning difficult.

Many advisors manage this risk by entering into formal or informal buy-sell agreements with other local advisory firms. Unfortunately, though, the reality is that in most cases such firms as buyers cannot effectively execute the deal when the time comes: the practices simply don’t have enough staff and support to instantaneously double in size as the firm takes over another advisor’s book of clients with no warning.

Nor for that matter, do they have the financial wherewithal to pay for the deal and buy the business from the planner’s surviving spouse or heirs (unless it’s already funded with life insurance, which is apparently uncommon). The conclusion in most cases: the friendly “I’ll buy your practice, you buy mine” strategy is a nice theory for an exit plan, but simply not feasible in practice.

Alternative Exit Strategies

So what are the alternatives for business exit strategies, where the advisor doesn’t want to quit and sell now (and/or is having trouble finding a successor anyway), but doesn’t want to have the business and its value collapse due to an unexpected health event (not to mention having clients poorly served as they are scattered to the four winds)? A few options are beginning to emerge.

The first is to sell the practice earlier rather than later–not as an exit strategy to stop working, but simply as an exit strategy for ownership. In the transaction–where the practice is usually sold to a much larger firm and integrated into their business–the advisor remains on board to keep working with his/her clients, and receives ongoing compensation (typically salary or a sharing agreement based on client revenues) for working with clients, but is bought out of the ownership interest. 

The end result is that the advisor can keep working with his/her clients for the indefinite future, and receive appropriate compensation for that work, but get paid for the value of the practice and be relieved of the burdens and stress of ownership and an uncertain exit strategy. Some planners have been hesitant to do so, noting that they give up on future growth of the business; however, if the planner wasn’t looking to keep growing the business anyway, and clients are older and taking withdrawals, there may not have been much of any upside remaining anyway.

In the meantime, the upshot to the strategy is receiving access to the larger firm’s resources, technology, and support, and knowing that clients will be taken care of after you’re gone because the acquiring firm can provide another advisor to ensure continuity for clients. In point of fact, our own firm Pinnacle Advisory Group is beginning to explore deals along these lines with several independent advisors around the country, and I’m hearing from a number of other $1B+ RIA firms also exploring the strategy; this trend of “tucking in” advisors to existing firms appears to be growing increasingly popular and appealing as a strategy for both the buyer and seller, especially as financial planning business growth has stagnated in recent years.

The second option is to establish a viable exit sale agreement that can be triggered at death (or potentially upon health decline/disability), but structured in a manner where the practice and clients could really be transferred if the advisor was unexpectedly out of the picture. This means the advisor can’t simply run his/her own practice as is until that future date and expect a smooth transition after he/she is out of the picture as many such deals are structured today; instead, the practice is transitioned operationally onto a platform that could function with both the original advisor and a new advisor, but the actual transition–of both clients and ownership –doesn’t occur until later. A version of a program like this was just announced by Focus Financial Partners, and another one for independent advisors was recently launched by Pinnacle Advisor Solutions

In both scenarios, the key is to recognize that practices and clients can’t just be transitioned instantaneously, and the process is even more difficult when the advisor has unexpectedly left the picture. But that doesn’t mean the only alternative is a multi-year succession plan; in fact, it’s becoming increasingly evident that a large number of advisors don’t want to leave their practices at all, and that the looming wave of business sales may just be a mirage.

Instead, many advisors want to “die with their boots on” and work until they just physically can’t, if it’s possible, and opportunities are beginning to emerge that allow for it. However, the pressure is on to take some steps in advance, not for succession planning but for unexpected exit planning, so that the practice and its value doesn’t just die with the advisor.


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