The Truth about Succession Planning in this Industry Hot

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This is not good news, but it is a strategy (and I use that term generously) that is declining fairly rapidly in the face of better techniques and the knowledge that a financial services practice is now the single largest, most valuable asset that most advisors own.  


Here’s what happens. At some point at around age 50, an advisors’ rate of annual revenue growth “plateaus” and subsequently begins to decline – these advisors are, in fact, “coasting” as opposed to building. In essence, this industry’s oldest and most experienced advisors have implemented a twenty year retirement plan punctuated by declining production numbers for the duration. From an advisor’s point of view, the issue is relatively simple. What’s more valuable - an ongoing paycheck until they die or quit, received at ordinary income tax rates, or the full value of their business (which most advisors don’t know) received at long term capital gains rates at some unknown and unpredictable point along the way?


The answer depends on how much longer the advisor wants to work. If time is not a factor (i.e., the advisor is not leaving the practice due to an extraneous issue), it can be better financially for an advisor to take the monthly “paychecks” (or business profits) over this span of time, assuming that the clients stay and the cash flow does not significantly decline. Basically, for a financial advisory practice with average overhead, the breakpoint is about four to five years — anything less than that time frame, an outright sale makes more sense; anything longer than that, staying in the business probably makes more sense.


In sum, for most advisors who are unsure of what they want to do next and have no precipitating reason to leave the industry immediately, the perceived value of their monthly “paychecks” is greater than the sale of the business at its peak, especially in the absence of a professional, formal valuation. This is why there aren’t more sellers. But we see this changing with each passing year.


One of the biggest changes to come about from the Great Recession is that financial service practices have become the single, largest, most valuable asset that advisor’s now own. As a result, equity management is being utilized by most of the major broker-dealers to ensure that advisors maintain their businesses and monitor value over time. The goal is to maintain both the compensation the business produces and the equity that will fuel an advisor’s retirement. You can and should have both rewards for the work that you do. With proper planning, it can happen. 


Like compensation, practice equity belongs to the retiring advisor. The responsibility for managing and protecting that equity, as well as for providing professional services on an enduring basis to a group of trusting clients and their families is that of the independent advisor and no one else. It’s time to step forward and take control of these independent businesses and the future.


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