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Delaying an advisor’s retirement (exit from practice) might be hurting their clients, their team members, and their family as well as themselves and their firm.
Determining the ideal retirement age is a personal decision for every financial advisor, and while many choose to work beyond traditional retirement age, it's crucial to consider the impact of this decision on clients, team members, and one's own well-being.
In this, the second of a series of articles on succession planning for financial advisors, we will delve into the potential challenges and issues that arise when advisors are reluctant to retire. Although I have attempted to categorize the risks by those most effected, most of the risks affect all stakeholders of an advisors practice. Many of the challenges creep up slowly, going unnoticed until something big draws attention to the issue, possibly when it is too late to minimize the damage. The lack of awareness or acknowledgment of these vulnerabilities can hurt the advisor’s clients, team members and practice while putting the advisor at risk both personally and financially.
Client’s Risks
As advisors age and continue to work, the risk of sudden personal or family health shocks increases, potentially requiring them to quit work suddenly, leaving their clients to find a new advisor or adjust to a new advisor chosen by someone other than the exiting advisor. This risk can be mitigated by a strong succession plan created by the advisor.
As an advisor ages beyond traditional retirement age, the advisor’s capability to provide top level service is likely to gradually decline. I expect we all know stories about an advisor who worked past their “best before” date. A study by Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Michigan found that as people age, the ability to answer basic financial questions that include knowledge, and the ability to apply that knowledge, deteriorates. The researchers found that average financial literacy scores fell by 50% between the ages of 65 and 85. The rate of decline was the same regardless of education, gender, and wealth. Even scarier…the study also found that there is no corresponding loss in confidence in one’s ability to make financial decisions. Clearly it is difficult for anyone to recognize reduced abilities in themselves. You have likely seen many of your older clients face, or refuse to face, this very humbling experience. There is no reason to believe that financial advisors are immune to the realities of aging. We owe it to our clients to honestly monitor our own capabilities as we age.
Team Member Risks and Concerns
Team members’ current and future career plans often hinge on the advisor’s exit plans. They need to know if they will be taking over some or all of the practice or how they will fit into the team of the successor advisor.
An advisors’ diminishing capabilities can place team members in the awkward position of covering for the advisor’s errors or reduced work capacity while they attempt to properly serve clients.
Advisor’s Personal Risks
As an advisor ages, the following risks to their personal life and wellbeing grow:
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The people they wish to spend time with will pass away or become incapacitated.
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Travelling or working on their “bucket list” will become more difficult.
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Business stress may directly affect their health.
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The advisor’s personal peace of mind may be more affected by the stress of the many uncontrollable elements and changes in the financial industry (markets, compliance requirements, technology, firm policies).
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Their practice becomes less valuable in the eyes of potential successors, thereby shrinking the value of their retirement nest egg and affecting their retirement lifestyle.
Advisor’s Financial/Practice Risk
There may be ongoing risks to the value and quality of the practice itself, especially if there is no transition plan or successor identified.
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Clients often start looking for their next advisor when they realize their advisor is nearing traditional retirement age. The clients and their families are aware of the client vulnerabilities even if the advisor refuses to acknowledge those dangers. If no successor has been identified, aging clients may feel the need to take action themselves before they become less capable of choosing a good advisor. Also, an older advisor’s clients become more vulnerable to suggestions from the clients’ next generation to move to a younger advisor.
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The longer advisors waits to retire, the less access they and their successor will have to the clients’ next generation as they acquire their own advisors (unless they are already clients or a younger successor is readily apparent).
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Aging clients become less valuable to a successor as practice referral values are usually based on expected future revenue from each client.
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As advisors age, it often becomes more difficult for them to keep up with technological advances. The pandemic forced many advisors to work from home with initial limited access to their assistants on whom they may have been relying on for technology assistance. While many advisors may be comfortable with technology and virtual meetings, others continue to be overwhelmed and unwilling to embrace the changes. Failing to keep up with technological advances can put an advisor's services behind competitors, affecting client satisfaction and retention.
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An advisor’s reduced capabilities could lead to errors and increased liability for the advisor and their firm. How awful would it be to end your career in the crosshairs of regulators or being sued by a client?
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The longer an advisor waits to retire, the harder it is for team members to stay interested and loyal to the advisor — especially if the advisor has toyed with their future by changing or never really setting a retirement date.
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Personal issues can lead to shortening the transition overlap period. Successors will not pay as much for a practice when the exiting advisor is unable or unwilling to participate in a significant overlapping service and introductory period.
All of these ongoing risks can reduce a practice’s revenues and assets under management, thereby reducing the price potential successors are willing to pay.
If your skills, attitude, or level of dedication deteriorate significantly, sooner or later you will be doing a disservice to your clients, your team, your family and your firm. I urge every advisor, especially those nearing or beyond traditional retirement age, to think about how all these risks and concerns could impact their clients, team members, personal situation, and family. The best protection against all these risks and vulnerabilities is a well thought out and written succession plan, as well as a realistic departure date.
The next article in this series will discuss how advisors can set the stage for exiting their practice without setting an actual date.
Related: When to Exit Your Practice? Your Best Timing Is Unique to You