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The average age of financial advisor in the U.S. is 56 years old, implying retirement is right around the corner for a not small percentage of the industry. By some estimates, 20% of advisors are expected to retire over the next few years. Stretch that timeframe out further and the advisors retirement data is arguably jaw-dropping.
“Over the next decade, 109,093 advisors plan to retire, comprising 37.5% of industry headcount and 41.5% of total assets,” according to a January 2024 report from Cerulli Associates.
Making advisor retirement date all the more alarming are two points. First, not enough young people are selecting this as a career. Second, as Cerulli points out, nearly three-quarters of rookie advisors succeed. Perhaps they’re going into it with the wrong attitude because just 13% of new advisors say this is their first career choice.
Add it all up and it’s no wonder that succession planning is a top-of-mind issuer for many baby boomer advisors. Succession planning is also a delicate balancing act because it’s very much a “you” issue where as nearly everything else an advisor does is focused on earning and retaining clients.
Making Succession a Priority
Advisors that are in their 50s ought to start paying some attention to succession if they haven’t already. Granted, the following statistic is from 2018, but it’s nonetheless concerning: just 27% have succession plans in place or anything resembling such, according to the Financial Planning Association (FPA).
So barely more than a quarter and that’s not enough when considering the curve balls life throws at us. Plus, clients and staff would appreciate knowing what the future holds when the principal decides to hang it up.
“Clients trust you with one of the most important aspects of their lives—their financial future,” according to Nationwide. “A clear succession plan reassures clients that they will continue to receive high-quality service even after you step down.”
Having a clear succession plan in place is important for other reasons. It can help enhance the value of the practice should the principal(s) opt for a sale in advance of their retirement. Second, it gets something out of the way so the founders/owners can spend more time grooming successors if an a family- or employee-led buyout is in the cards. Related to the second point, is continuity. As in a well-defined succession plan minimizes disruptions in service. Clients will appreciate that.
“Without a detailed plan, operational disruptions, client concerns, and diminished morale can jeopardize your firm’s stability. Especially in a profession built on trust, clients need assurance that their finances won’t be left in limbo,” adds Nationwide.
Where to Start
When retirement is drawing closer, that’s a good time for an advisor to start with the basics of getting a handle on the practice’s value. Neutral third-parties can assist with that and it’s important to keep there are moving parts here. Even a ballpark figure can help facilitate the next step, which is deciding what the exit plan will be – sale to an outside party, sale to staff members, or grooming a traditional successor that allows the seller to gradually leave the business.
When those blocking and tackling issuers are taken care, the principals can then move onto creating a detailed transition strategy that includes a timeline, legal documents, financial details and steps in the transition. Further out comes actual implementation and that depends on the circumstances in which the advisor(s) is leaving.
“You and your buyer may work with an attorney and tax advisors to determine the type of buy/sell structure that makes sense, have documents drafted, and devise a tax strategy for the sale,” concludes Nationwide. “It’s important to remember that the implementation stage won’t be complete if the plan is not funded. If there’s nothing set aside to meet the obligation when the time comes to buy the business, the successor might not be able to complete the purchase.”
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