Uncovering the potential – and hidden risks – of retire-in-place programs like ALFA often comes down to answering these 8 questions
The opportunity for an advisor to monetize his life’s work without having to change firms can be very compelling. However, the reality is that the decision to do so comes with some important caveats requiring careful consideration by the advisor looking at retirement as well as his successors.
Retire-in-place programs such as UBS’ ALFA, and similar offerings by Merrill Lynch, Morgan Stanley and a number of other major brokerage firms, reward advisors for their tenure and offer a path of least resistance for their successors. Yet they necessitate a re-commitment to the firm for both the senior advisor and successors for the life of the agreement.
Programs like these have an impact well-beyond the advisors they are designed for – even those who have no foreseeable plans to retire nor stand to inherit a book of business – as they further tie advisors to the firm, potentially diminishing their leverage and thereby shifting the balance of power from the advisors to the firm.
Accepting ALFA requires an advisor to, in essence, predict the future – or at the very least – say with confidence that, “Regardless of how things may change at UBS, I can live with it for at least the next 5 years—and so can my successors and clients.” Plus, a successor needs to be especially aware that his obligation may extend several years beyond the retiring advisor’s.
Therefore, before signing on the dotted line, it’s critical that all members of a team conduct a careful evaluation of the business with
a clear vision for the ongoing legacy that the next gen will be inheriting.
To gain clarity, advisors should carefully consider the answers to these 8 questions:
- How satisfied are you with the level of support you currently receive and how confident are you that this level of support will continue?
- How satisfied are you with the firm’s current platform and technology?
- How confident are you that the firm will continue to invest in and improve upon the platform and technology?
- Do you believe that the firm will continue to best serve all your clients, both UHNW and others? Will all your clients continue to have access to the full breadth of services and products?
- Will you continue to be compensated in a fair and reasonable way?
- How confident are you in the direction that the firm is heading?
- Do you anticipate that management’s goals and vision for the future will continue to align with your own?
- How confident are you in what the firm will look like in 2 years? In 5 years? In 10 years?
With reward comes risk
While compelling when taken at face value, succession programs such as ALFA are designed to retain talent and assets, and as such, they come with strings attached which are designed to further bind advisors to their firms. Therefore, it’s important that everyone be aware of the risks inherent in signing on.
- You – and your team – are signing on to the firm for the life of the obligation.
If you decide that the firm is no longer serving you or imposes a decision that you can’t live with, you may be forced to jump ship—from a position of weakness, not strength. Plus, you are binding your next gen to the firm—taking away their optionality and ability to be free agents, which is especially problematic for younger advisors who may have their sights set on life outside a wirehouse.
- More restrictions placed on a business means lower value.
If you want to leave after having signed an agreement that binds you further to your firm and adds more restrictions, the value of your business becomes diminished—and the business becomes less desirable to buyers.
- It’s contrary to the notion of being a true fiduciary.
A fiduciary has the freedom to make decisions rooted in their clients’ best interests. If you are not certain that the firm is the best place to serve your clients, yet are further bound to it, there exists an incongruence between your actions and your beliefs.
How best to proceed
The path of least resistance for those soon-to-retire is undoubtedly to monetize in place by signing on to ALFA—especially for the most successful advisors who have a direct line to the top, and a higher likelihood of getting their needs met, plus perks that their lower-producing colleagues may not enjoy.
If you are sure that UBS is the very best place for you and your team to grow your business and serve clients for the foreseeable future, then to have a seamless transition to retirement while creating liquidity for what is often an advisor’s single greatest asset – his book of business – is a homerun. The problem today is that most advisors – even those “happy enough” – are just not 100% sure that their firm won’t “do something stupid,” as one multi-million-dollar advisor put it. That is, that the firm won’t cut comp or impose more limitations down the road. According to another large team that left UBS to form a fee-only RIA: “We were perpetually on the EFL train. Every time the firm gave us money, it was attached to another note that bound us further to the firm.” In the end, these advisors were willing to walk away from significant deferred comp to buy their freedom.
For those whose goal is to maximize their business’s value at day’s end, then signing on to any program that diminishes optionality – even if it allows you to create liquidity in the near term – will unequivocally limit your ability to realize your business’s true potential.
That said, this is a decision to be made with eyes wide open and focused well beyond the dotted line. This may be an opportunity to get familiar with the world outside of UBS – where a greatly-evolved landscape offers a new waterfall of possibilities for advisors at every stage of their career – then use that knowledge to compare and contrast the different paths leading to your next chapter.
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