Plan your exit sooner, not later

He asked me: “When are you going to retire? Should I start looking for a new advisor?”

I tried to make a joke of it by saying something like: “Oh, I’ll never retire because nobody else would put up with you as a client!”

But his forced laugh told me his concern was genuine.

It made me think that I must have other clients wondering the same thing, and I realized that I haven’t been following the advice I give clients – plan ahead – when it comes to my own retirement.

I’m not sure why I have been putting this off. Perhaps I do think I am immortal or, at least, going to be in great health and enjoy my work forever. But this topic is obviously something I need to start thinking about.

Any words of wisdom to motivate me to spend the time it will take?

Coach says: Succession planning is a very hot topic, probably representing two out of three of my coaching engagements today. The reason is simple demographics: the leading edge of the baby-boomer generation is starting to retire, and that includes many financial advisors.

The average age of advisors in North America is early to mid-50s. More important, in my view, is the fact that the average age of our senior financial advisors is higher than that: more likely in their mid- to late 50s. This latter group are the advisors who have most of the client relationships and manage most of the investment assets. In the majority of cases, these advisors are within 10 years of retirement.

Here’s another important fact: the average age of this latter group is accelerating at a faster pace than the overall advisor population. My prediction is that succession planning will be one of the most important challenges for our industry in the next five years.

If it makes you feel any better, research shows that only about 10% of advisors actually have a written succession plan. Another 40% or so have given it some thought but haven’t committed anything to writing – which leaves half of advisors with no plan at all.

My guess is that – like many advisors – you have spent a good part of your life building your practice. And it wouldn’t be surprising if you have the bulk of your personal net worth tied up in your business – making it your most valuable investment asset, the one you are counting on to help to fund your lifestyle in retirement.

Of course, there should be more to your succession plan than the financial aspects. You also want to be in control of your exit from the business and you want to make sure that your clients – those close relationships with people, like your cottage buddy, who have trusted you with their financial affairs – are well looked after.

Finally, remember that your succession plan is really about your personal legacy: how you will be remembered for what you did in your professional life.

So, with all these good reasons for succession planning, why do only 10% of advisors actually have a written plan? Here are my theories. Note that most are not about the mechanics of succession, but about the more emotional issue:

They think they are too busy running their practice on a day-to-day basis to take the time to strategize and create a written plan. That is not an excuse advisors are likely to accept from clients; but, for some reason, many advisors believe it is OK for them to think that way.

Many advisors don’t realize how long it can take to design and implement an effective succession plan, so they assume they have lots of time before they need to think about it. In fact, the best succession plans unfold over a five- to 10-year period.

It is not uncommon for entrepreneurs to have their entire lives defined by their involvement in their businesses, and nowhere is this more evident than in the financial advisory industry.

Because advisors are constantly “on the job,” so to speak, looking for new client opportunities, responding to existing client requests and a host of other activities that seem to pervade their lives at any time of day or night, they simply cannot visualize what else they would do with their time. In the absence of something exciting to retire to, advisors will postpone thinking about their eventual withdrawal from the business so they can stay within their comfort zone of familiarity.

Some advisors believe their clients and staff will react negatively to any suggestion that the advisor might be contemplating retirement. In fact, the opposite is true. Clients and team members want to know what plans the advisor has in place for the continuance of the business when he or she decides to make the transition to retirement. Clients, in particular, want assurance that their affairs still will be well managed. Just because the advisor retires doesn’t mean clients’ needs go away. Many clients will be retired for longer than their advisors will, so they will require ongoing attention and care.

Finally, I have seen advisors postpone their succession planning because they anticipate conflict between potential successors, including family members, and these advisors simply want to avoid the conversation for as long as possible.

For those few advisors who actually have a succession plan, most are focused on the mechanics of the process: finding the right successor, determining financial arrangements and the legal transfer of business ownership.

However, it is often the softer issues that determine the success of any transition plan, including:

– Your personal goals. How will you spend your time? What kind of lifestyle do you desire?

– Others with a stake in your transition – associates, staff, your dealer firm and, of course, your family. What expectations or hopes do these stakeholders have regarding your retirement?

– Your definition of “retirement.” Will you leave your business entirely on a specific date or do you want a more gradual transition? Or, perhaps, no total transition at all – just a change in your status and time commitment.

– When to start?

The basic answer to the question of when succession planning should begin is “sooner rather than later.”

Many advisors think two to three years is sufficient time to put it all together. However, in my experience, it is not. It easily can take more than five years to design the plan, find a successor, train him or her in your way of doing business and introduce your successor to your clients.

This last step is a particularly important one from a financial perspective. Very few practices trade hands for 100% cash up front. Most transactions are done on an “earnout” basis, with a clawback clause to account for unexpectedly high client attrition. Experience suggests that the longer the transition period – that is, the longer the departing advisor is involved – the greater the likelihood that current clients will remain with the new advisor.

There is a practical limit to how long you can and should stay around to help with the transition. But more involvement generally is better than less.

Thoughtfully planning your succession in advance will ensure that key decisions are made strategically rather than under the duress of an unanticipated event. This planning also will provide you with time to think about what you want to happen, striking the best balance between what you want personally and what is required for your business.

You will be able to focus on managing your business until retirement, knowing your plan is in place. You can control the timing of your departure to take advantage of conditions that typically yield higher valuations. And you can provide assurance to your clients and staff, reducing the risk of defection.

Meanwhile, your successor will have time to gain the knowledge or skills required to manage your business.

George Hartman is co-founder and managing partner of Accretive Advisor Inc. in Toronto. Send questions, comments and opinions on any aspect of practice management to ghartman@accretiveadvisor.com.

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