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Aiming to sell your practice? A mega team may be interested

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The industry has long been aware of a mounting crisis: recruiting enough insurance and financial service professionals to replace boomer-age advisors planning to exit the business. The issue has often been presented in terms that assume an ability to easily exchange one producer for another, irrespective of the expertise, resources and market focus of the departing advisor.

Such simplistic assumptions understate the problem. Fact is, many practices are highly specialized. Some cater uniquely to retirement or estate planning needs of the high-net-worth. Others focus on executive compensation or succession planning for business clients. Still, others tailor their offerings to those requiring long-term care, special needs planning or charitable giving.

The obvious solution for advisors occupying such niches is to recruit and cultivate young protégés to service less profitable clients. As these junior advisors mature and learn the finer points of the business, the retiring advisor can gradually hand off more profitable clients, assuring a seamless, uninterrupted transition.

Problem is, too many advisors aren’t recruiting and mentoring financial professionals to replace them. As I noted in a column on the NAILBA 34 annual meeting last November, the problem is particularly acute among commission-only agents and brokers. 

LIMRA Associate Research Director Laura Murach, whom I interviewed at the conference, says a study — underway at the organization — may validate a theory of hers: that agents and advisors who work on commission only are less motivated than their fee-based counterparts to plan for their departure. Whereas the latter are charged with managing a client’s investments on an ongoing basis, the former have less of a financial incentive to maintain contact with existing clients (cross-selling opportunities notwithstanding). And thus the price to be paid for an unplanned exit is lower.

Whatever the reason, advisors who haven’t developed people internally may have to look to a third party to take over the practice. By generating continuing revenue from the practice (i.e., recurring commissions or advisory fees charged to existing clients), an outside buyer can provide the exiting advisor with an ongoing retirement income stream.

Which brings us back to the issue of expertise. The majority of advisors run (like the clients they serve) small firms that field (at best) a handful of staffers to serve different planning and practice needs. For the retiring specialist, such small practices may not have the breadth of expertise or back-office support necessary to keep wavering clients loyal during a transition phase.

Enter mega advisory teams: practices that hold more than $500 million in assets under management. Cerulli Research observes in its first quarter 2016 issue of the “The Cerulli Edge — Advisor Edition,” that such mega teams are best positioned to acquire and manage the clients of advisors leaving the business

One reason: the wide-ranging expertise they boast to serve clients’ cradle-to-grave planning needs. Also sure to appeal is the ability of such mega teams to maximize earn-outs — additional payments based on the future performance of the business sold — for the exiting professional.

“These teams have [the] infrastructure to assume additional client relationships,” the report states. “And they are best-enabled to provide a seller’s clients with an ongoing positive experience.”

The report adds that mega teams are also well placed to acquire “tuck-ins:” advisors who desire independence but also seek the resources and interdisciplinary skills of a larger firm. Such tuck-ins include not only exiting advisors, but also younger advisors ill-prepared to assume full responsibility for managing their own firms.

Many of the largest mega teams, Cerulli notes, also build internal succession planning into their governing structure. That enables them to create value and lay a career path for future leaders as the founding principals leave the business.

Not surprisingly, these super-size teams also enjoy a disproportionate share of assets under management: Cerulli notes that, though they only represent 23 percent of advisors, they now control 54 percent of AUM industrywide.

That market share is likely to grow as the advisory world continues to consolidate. For advisors without a succession plan, these mega teams may be the best option for securing a retirement income from the practices — and for assuring their clients ongoing, best-in-class service.

See also:

Business owners don’t plan to retire

Business succession planning: The day after disaster strikes

Business succession planning: Look to life insurance

A case study in life insurance as a succession planning tool


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