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by Maria Considine King and Joni Youngwirth​

As they near the end of their careers, financial advisers often lament that succession planning is a complex, difficult process. There is the technical aspect of succession planning that involves finding the right buyer, valuing the business, negotiating the deal, and executing the arrangement; but for many advisers, the more difficult aspect is accepting the fact that a long, rewarding career is winding down.

To make a successful transition to retirement, it’s important to address both sides of the equation—emotional and logistical. Too often, advisers tend to invert the process of preparing for retirement: they work first on the mechanics of a transition before addressing their own emotional readiness. This is understandable, but the technical aspects of a transition should be designed to support your move into the next stage of your life.

The Emotional Side: Grieving the End of Your Career

When we lose someone we love, we tend to go through five stages of grief, a theory developed by psychiatrist Elizabeth Kübler-Ross. When someone loses a job unexpectedly, the grieving process is well documented. But the stages of grief can also apply to the end of a career. For some advisers, going through the five stages may be a necessary precursor to transitioning their practices to a successor.

Denial. None of us likes to acknowledge our mortality. But when it comes down to it, is the adviser who refuses to consider retirement any different from the client who never gets around to creating a power of attorney, health care proxy, or will? Or what about the adviser who chooses not to see subtle changes in his mental acuity?

Anger. As an adviser enters the late stages of his or her career, anger may take the form of a complaint against the industry in general, such as “What is compliance making me do now?” Or when clients consistently ask, “When are you retiring?” and family members question the adviser’s memory, anger may be the reaction.

Bargaining. An example of the bargaining stage might be the adviser who is reluctant to let go of anything and negotiates a continuity plan that keeps him fully in control—until the eleventh hour, when he finally sees the need for the firm to have a formal CEO. Or perhaps an adviser nearing retirement unintentionally sabotages a next-generation adviser by being a “relationship hog” with existing clients. Without fully realizing what he’s doing, an adviser might even terminate a junior adviser so that he can procrastinate on retirement and start the multi-year development process all over again.

Sadness. The adviser may reflect on what he could have or should have done and feel remorse or profound sadness.

Acceptance. In this stage, the adviser acknowledges that there’s more to life than one’s profession. Peace comes with accepting a full career, gratitude for the opportunity to have made contributions, and anticipation for what lies ahead.

The Technical Side: Transition Logistics

Once you’ve done the emotional and psychological work of readying yourself for retirement—in whatever form it may take—the logistical work of readying the practice for transition is likely to go more smoothly.

Identifying your successor is the first critical step in the year or two after you have prepared yourself for a transition. Take your time to get to know him or her; having shared values and philosophies is essential (see the cover story on page 32 for more on finding the ideal buyer). Once you’ve chosen your successor, you will want to assess the transferability of five key elements of the practice by answering questions like the ones below.

Operations. The more aligned your practice is with that of your successor, the more seamless the transition and the more likely the retention of clients.

  • How similar are the two firms’ procedures?
  • What can staff from both practices do now to close any gaps that may exist?

People. Transitioning your practice to your successor may mean a new stage in life for your staff as well as for you. Some staff members choose to retire when their adviser does; others are energized by the prospect of working with a new group of people.

  • What role(s) will staff play after the transition?
  • Will there be duplication of roles?
  • Are staff members willing to work for the new firm?
  • Which staff are most critical to keep on to ensure retention of clients?

As a rule of thumb, consider negotiating a six-month transition period for your staff, during which they will help your successor retain clients and give the new adviser an opportunity to see their work firsthand. Also review your compensation plan to see how it matches up with your successor’s. Generous advisers may find that high staff salaries create a barrier for their successors because the staff is too expensive to retain, despite their talent.

Profitability. During due diligence, you and your successor will want to determine how profitable the business is today and how profitable it will be once it is combined with another book. Create a common-sized income statement to shine light on your overall profitability, as well as the specific revenue and expense categories that are applicable to your firm. To give you and your successor perspective on your expectations, look to industry studies to see how your firm lines up against the industry overall and to firms of a similar size.

  • What is the revenue breakdown of your book of business—advisory recurring, non-advisory recurring, commissionable?
  • What is the concentration risk of your book in specific asset classes? Specific assets/products? Specific clients? Specific target markets/regions?
  • Do you have a consistent, easily understood pricing matrix for your services?
  • How closely does your pricing matrix align with your successor’s matrix?

Clients. Retention of top clients is key to a successful transition. Your successor will benefit from an understanding of how much revenue and assets are attributable to certain groups of clients so that he or she can plan an approach to working with them.

  • What proportion of your book (assets and revenue) is concentrated in the top five clients? The top 10?
  • How do your clients break down by age, location, profession, and niches?

Service model. Your clients have grown accustomed to working with you in a particular way and to expecting access to your firm at key times.

  • How does your service model differ from your successor’s model?
  • What changes will your clients experience by working with your successor?
  • What can you do to prepare them for this change?

This assessment is a starting point for the conversations and negotiations you will have with your successor. What you discover will influence important areas such as the value the buyer places on the practice, the price he or she is willing to pay, and the terms of the agreement. Working with third parties may help to ensure objectivity throughout the process and reassure you that you are on the right path.

When you reach an understanding, you will want to document it in a legally binding buy/sell agreement. Of course, the written agreement that you create with your successor should be reviewed by the attorneys for both sides to ensure that your individual interests are met, as well as by a tax specialist to clearly assess the tax impact on the seller.

Now the Real Work Begins

When you have a written agreement in hand, you will have come very far, but the work isn’t over yet. In fact, now is the time to roll up your sleeves and get busy.

Transitioning a book of business is not accomplished simply by changing the adviser of record on accounts. Your back office may have a team in place that focuses on assisting advisers with the logistics of transitioning their book. Look for them to have dedicated experts in compliance, legal, technology, operations, account services, licensing, and so on, who are familiar with the nuances of moving accounts due to retirement. The earlier you can involve them in the work you are doing with your successor, the more familiar they will be with your situation, and the more ready they will be to get things started at the right time.

Planning for the end of your career can be an emotional, complicated process. It’s about more than the financials and the logistics, although it’s tempting to start there because answering the what and the how is often easier to do than answering deeper questions about yourself. Who have you become in your years as an adviser? In whose life will you make a difference in the future? Who will you become next? Your career as an adviser may no longer be a work in progress, but your contributions to the world still are.

Maria Considine King is vice president of practice management at Commonwealth Financial Network in Waltham, Mass.

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network in Waltham, Mass. She is a regular contributor to the FPA/Journal of Financial Planning Practice Management Blog.

 

Sidebar: 

Why Aren't Advisers Retiring?

As you’ve likely heard, the average age of advisers has been climbing steadily—54, 55, 56—and instead of retiring, many are choosing to “die with their boots on.” Meanwhile, fewer young advisers are entering the profession to fill their shoes. Why are so many putting off retirement?

It’s a cultural shift. Many advisers are among the 76.4 million baby boomers who are changing what retirement means. Once they turn 65, half of boomers will continue to work in some way. More and more, we’re hearing the terms “retirement 1,” “retirement 2,” and “retirement 3” to refer to an individual’s successive careers after formally retiring from a position. Whether it’s doing something completely different or simply doing less of what they’ve always done, boomers are redefining traditional notions of retirement.

For financial advisers, continuing to work shouldn’t be an issue as long as you have a well-documented continuity plan, are capable of doing the job, and—especially in cases of ensemble organizations—can help transition leadership to ensure that the firm continues to thrive. On the other hand, when solo advisers begin to cut back without a well-thought-out plan, the business may gradually move into decline.

Advisers just love being advisers. Beyond the general trend of working in retirement, many advisers put off succession planning because they gain tremendous gratification from their relationships with clients. After working for decades, they’ve helped many people achieve a more secure financial life than they could have had otherwise. It’s immensely fulfilling—to the point that some advisers resist stepping awaying from client relationships because they so desire that feeling of gratification.

But eventually, no matter how strong your passion for the work, new clients stop joining an aging adviser’s firm. You may notice that clients start asking when you plan to retire. Your spouse may start asking when the two of you can take more time to travel, and the kids may nag you about adopting a new hobby. At the same time, you feel very comfortable with the work/life balance you’ve established over the years. You see yourself working indefinitely.

In short, many advisers continue doing what they’ve always done because it’s so difficult to accept the reality that they’re at or near the end of a very satisfying period of their lives.

—M.C.K. and J.Y.

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