For years, many advisors have been operating under the assumption that successors who inherit or buy a book from a retiring advisor are stuck until their succession obligation has been completely forgiven. That is, should these inheritors decide that their firm is no longer the right home for their growing business, they’d have no choice but to wait out the terms of the agreement and hope for the best.
But that’s not necessarily the case—with plenty of next-gen inheritors who still had time left on their agreements and made successful moves in the past year serving as proof of concept.
The reality is, as with most things in this industry, where there’s a will, there’s a way: If an advisor believes that there is an option that would allow them to better serve clients and accelerate their business growth, they can, and probably should, find a path to pursue it.
This is in no way an indictment of retire-in-place programs (also known as “succession” or “sunset” plans). These programs, such as Merrill’s Client Transition Program (CTP), UBS’ Aspiring Legacy Financial Advisor program (ALFA) and Wells Fargo’s Summit, can be compelling for senior advisors who have every intention of retiring from their firms and being rewarded for their life’s work without making a move. And for next-gens, it’s the path of least resistance to acquire a retiring advisor’s book and instantly increase assets and revenue.
Yet, no one can faithfully predict whether the inheriting advisor will continue to believe that their firm will be the right place to grow the business and best serve clients in the five to seven years ahead (the typical life of a succession agreement).
That leaves the industry with a large number of advisors who want to take advantage of the ability to become heir apparent to a senior partner’s business while retaining control over their path forward—including the option to change firms should they decide to do so.
Stuck or not stuck? That’s the multi-million-dollar question
I can’t tell you how many next-gen advisors my team and I have spoken with over the past few years who signed on to these agreements and are now experiencing buyer’s remorse.
Jeff, a next-gen advisor at a major firm, contacted me recently to discuss his options. His senior partner, David, had signed on to their firm’s retire-in-place program three years prior. At that time, Jeff felt that the post-employment restrictions attached to David’s book were a small price to pay to take on an additional $400 million in assets. Fast forward three years into the five-year agreement, and Jeff and his team are less certain that being tied to their firm for the remaining years is best for the business and their clients overall.
As things changed at his firm, Jeff shared concerns not unlike what we hear from many other advisors: The excessive bureaucracy, constant need to justify themselves, ever-increasing mandates and management to the lowest common denominator limit their ability to serve clients with creativity and grow their business in an unfettered manner.
“Mindy, I’m not sure I can take another two years here!”
As more firms look to stem the tide of attrition by binding as many advisors as possible via sunset programs, Jeff, and next-gen inheritors like him, find themselves in a difficult position: tied to a firm by the fine print of a succession agreement, of which, in hindsight, they may not have fully understood the implications.
Advice from an expert: Attorney Tom Lewis weighs in
With more of these conversations taking place over the past few years, I invited Tom Lewis, certified civil trial attorney at Stevens & Lee in Princeton, N.J., to share his experience with those who find themselves in Jeff’s position.
Mindy Diamond: What should advisors who are considering signing on to a succession program be aware of?
Tom Lewis: Taking over a book from a retiring advisor offers many advantages, including increasing your client base, production and revenue. But taking over the book also carries obligations, including paying for the book over time, and certain restrictions that may make it difficult for the advisor to move to a new firm.
MD: So, are advisors who have already signed on to these agreements stuck?
TL: Advisors who have inherited a book and are having second thoughts should not feel hopeless. Best practice would always be to have your agreement reviewed by experienced counsel. Many agreements may allow some maneuverability in exchange for a preset payment. Other agreements contain nonsolicit provisions that can't be waived and should be strategically reviewed. Some allow departure to a new firm provided that certain provisions are followed. Other agreements may be silent on whether a simple announcement can be made to your inherited clients informing them that the financial advisor is now at a new firm. The end result is almost always that clients who are well served by their advisor typically follow that advisor to a new firm.
MD: Have there been any successful moves by advisors prior to their succession obligation being fulfilled?
TL: Many advisors who took over a book from a retiring advisor have made successful transitions. The key is complying with state law, restrictions contained in the agreement and industry standards. We want to stay away from litigation and allow the client freedom of choice.
MD: What are best practices for next-gen advisors considering change?
TL: Advisors should not feel stuck but rather be proactive in determining what options exist to join a new firm. Always retain a copy of the agreement containing the terms and restrictions for the retiring advisor’s clients. Best practices also suggest having the agreement reviewed by experienced counsel to determine what limitations and what rights the acquiring advisor has for the inherited book. Different firms have different agreements with different terms and restrictions. Further, each firm takes differing positions on whether a simple announcement will be tolerated.
While these succession agreements do have restrictions, an advisor who has signed on as heir apparent still has options. And, ultimately, so do their clients—who are always free to choose who will serve them.
While we can’t name names, one example of a successful transition we facilitated is of a wirehouse team that left 3 1/2 years into their five-year succession agreement. They followed advice of counsel and, on departure, strictly abided by their nonsolicit mandate. The team simply sent a press release announcing their move and were able to field calls from their clients, provided they answered questions directly without solicitation. As a result, they are on track to move 100% of their book within nine months of the transition—without incident from their prior firm.
No doubt, there are transitions that go wrong, but in most cases, the failure point is where the departing advisor “pokes the bear” and violates the terms of their agreement in one way or another—giving their old firm ammunition to go after them.
If you are a next-gen advisor who is considering signing on to one of these succession agreements, be sure to read the fine print. And if you’re an advisor who’s already signed on and is having second thoughts, it’s imperative to have legal counsel review the agreement, advise you on any and all implications, and provide best practices to complete a transition successfully.
The result of any move should be more than “better enough” to warrant the hassle and disruption it entails. But for those who are bound by one of these agreements, there are even more complexities, so the bar is set that much higher. It’s imperative to ensure that a transition will significantly improve both the ability to serve clients and grow the business in ways that cannot be achieved at the current firm. Ultimately, the good news for these advisors is that they do have the option to make that decision if they have second thoughts about having signed on the dotted line.
