A couple of months ago, ThinkAdvisor’s Gil Weinreich posted a story (Advisors: Don’t Sell Your Practice!) about a newly released white paper from CLS Investments in Omaha titled “Reinvent Your Practice: Alternatives to Traditional Succession Planning” (okay, I’m a little behind on my reading).
In it, the third-party money manager—which also offers practice management consulting to its affiliated advisors—suggests that owner-advisors should think twice about “selling” their firms to an outside firm when they reach retirement age.
CLS does a good job of illustrating the current crisis in advisory firm succession. However, in places, the paper seems a bit confused (such as when it mixes an internal succession with an outright sale to a third party), and more importantly, does a poor job of assessing the other options available to owner-advisors approaching retirement. Perhaps that’s not surprising, given that CLS has an obvious conflict of preferring that its client firms don’t fall into the hands of other firms that don’t use its services.
First, the bad news. CLS paints a not very happy picture about the current state of advisor retirement based on a poll of 117 of its client advisors. (Surprisingly, CLS offers no information these “advisors”—such as their ages, proximity to retirement, the size of their firms or source of their firm revenues [AUM or commission], which would allow for a clear analysis of their data and of their valuation methodology. CLS did not respond to our inquiries for more information.)
By way of introduction, CLS cites a Pershing Advisor Solutions/Moss Adams study that shows “only 28.7% of advisors have defined or implemented a succession plan.” It also references a Cerulli Associates survey showing the average age of advisors today is 51 years, with 43.3% of advisors over 55. I think we can all agree that retirement is a looming issue for the advisory industry.
Then, CLS adds its own data, starting with the scope of the retirement “problem.” Some 46.5% of advisors project they’ll need between $1.5 million and $3 million to retire comfortably, and another 14.3% figure they’ll need more than $3 million. Altogether, that’s 60.9% hoping for at least a $1.5 million nest egg.
To date, however, only 30.2% of advisors have funded more than half of their retirement goal—which of course, leaves a whopping 68.8% who have yet to get to the glass-half-full mark (and remember, 43.3% are over 55).
Where do these advisors think the rest of their retirement is going to come from? You guessed it: CLS data shows that some 55% of advisors polled expect to fund at least half of their retirement through the sale of their firms.
By comparing amounts advisors “need” for retirement, with the current state of their savings, CLS concludes: “Thus, over half the industry is banking on the idea that their practices will fetch anywhere from $750,000 to $1 million when they retire.”
Pretty clear so far, right? Unfortunately, here’s where things start to get a little murky.