It would be easy to assume that financial advisors should be well-prepared for retirement. After all, they have direct access to the tools, resources and expertise anyone could need to properly develop and fund a retirement plan. However, many financial advisors were caught off guard in the 2008 stock market crash and are just now regaining their financial equilibria as they struggle to get back on track. Financial advisors have the potential to earn high incomes; if they follow the same advice they dispense to their clients, they have a better chance than most people to get on track for retirement. The larger retirement challenge for financial advisors is whether they can transition out of their practices in a way that can maximize equity value for enhanced financial security. For an advisor, a succession plan is his retirement plan.
Many financial advisors spend their entire working careers building practices that might be composed of hundreds of clients. Their clients are the source of revenue streams that, without well-conceived exit strategies, could be lost when they stop practicing. Many advisors don’t even think about exit strategies until it is too late. The average age of a financial advisor today is 56, yet only 29% have a written succession strategies. To ensure enough time to plan their exits and be able to monetize their clients for future financial security, financial advisors should begin their planning at least 10 to 15 years before their anticipated retirement dates.
Ease Into Retirement
As with other types of professionals, many financial advisors can't imagine not working in their practices. They love what they do, and they don't want to give up their client relationships. However, many financial advisors would prefer a better work-life balance, which might lead to full retirement at some point. This could mean gradually reducing their work weeks from a typical 50- or 60-hour week to 40 or 30 hours initially and tapering off from there. With the technology available today, advisors can gain more work-life balance by working remotely from anywhere. The danger in working less, however, is if the revenue drops, the value of the business can drop as well.
Groom a Successor
An increasingly popular option is to identify a potential successor and groom him to take over the practice eventually. The ideal candidate is a younger person with three to five years of experience. Once the candidate has developed the requisite skills, knowledge and temperament to engender trust, it's time to implement a long-range plan. This option will require sufficient time to identify, groom and gradually hand responsibility over to the successor. Bringing in a hand-picked successor leaves the door open for the retiring advisor to maintain a smaller role in the firm.
Sell the Practice
Some financial advisors see themselves simply selling their practices and walking away. These advisors tend to be sole owners of their practices, who make the decision late in their careers because they have had enough, and simply want to retire. There are a large number of potential buyers, typically their own broker-dealers or custodians, other advisory firms or independent financial advisors. The challenge is finding a buyer who can meet the asking price, and who can be trusted with the advisor's clients. In straight sales, it is typically the clients who are affected the most, which is why most advisors try to avoid this option.
Tuck the Practice
This option could be the answer for advisors who prefer to ease into retirement while staying in touch with their clients. The advisory industry is growing, and many firms are looking for partners who would be willing to tuck their practices into the advisors' practices, somewhat like a merger. The smaller practice would benefit from the larger scale of resources, and the clients would appreciate the gradual transition to a like-minded firm. Ultimately, the advisors' practices could be absorbed by the larger firms based on sale agreements.
The hardest part of retirement for most financial advisors is the thought of leaving lifelong client relationships behind. Choosing the right option for retiring from practice is not always about the money, but about doing what's best for their clients. However, without an exit strategy and practice succession plan, the clients bear the brunt of the transition. Whether it is about your own financial security or the emotional ties you have with your clients, begin planning as early as possible.
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