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