A recent Cerulli report finds that about 37% of today’s advisors are expected to retire over the next decade, and almost 25% of advisors who plan to retire in the next 10 years do not have a succession plan. What does that mean for the clients of these advisors? And what about any team members who helped service those clients? Then there are the advisors themselves to consider—the financial planners who failed to apply their own craft to themselves. Will these advisors forego the full financial benefits of having built their practices after years of hard work?
Without context, these statistics might indicate that these advisors are not concerned or have not considered their options. Circumstances, however, are often more complex. For example, an advisor may recognize that joining another firm is an option, but struggle to find the right fit. Or they may be dissatisfied with the service model or culture at their current firm and do not desire an internal transition. Some may find it difficult to imagine transitioning into becoming an employee at a larger firm, especially after operating in a smaller practice over many years. Still others may hope that a team member will further develop and become a successor for the practice, only to find out it is taking longer than anticipated. With all of these scenarios, a rapid transition eventually may become necessary.
Keys To a Successful Rapid Transition
It is possible to execute a rapid transition successfully. Doing so, however, requires that the advisor find a firm that has the following characteristics and elements in place.
1. A Client-Focused Service Model
Advisors seeking a rapid transition have to think clearly about the service model that will best serve clients for decades to come. Consider the transitioning advisor who may not come from a fiduciary, fee-only model or one with deep planning and innovative services and technology. Once they have decided to make a transition, they are free to consider a full array of service approaches and possibly a superior model for the future. We all form biases over our careers, but transitions are an ideal time to reflect on and, when appropriate, reject those biases on behalf of clients.
2. An Experienced Enterprise
It is critical that a transitioning advisor focus on the expertise and experience of the new team to which client relationships ultimately will be entrusted. If an advisor works with clients that have distinct needs, such as corporate executives or business owners, it is important that the new team be well-versed in servicing those clients.
Additionally, although technology has made it possible to serve clients remotely, it may be important for clients to know that the new advisory team is local to their area. For advisors who have pockets of clients in multiple geographies, that may require engaging with a national firm that has multiple offices.
Perhaps most importantly, the advisor should seek to transition their clients to a firm with a track-record of success in working through transitions. Astute advisors recognize that there is only one chance to execute on a transition and failure is not an option. Further, a firm that has evolved from a collaboration of practices to a business to an enterprise, and is sustainable for generations to come, will be there for clients and their heirs well beyond this initial transition.
3. A Precise Plan
A thoughtful plan is critical to a successful transition, especially during a rapid one. The plan should include these elements:
- An analysis of the advisor’s employment agreements, assuming the advisor is not a single proprietor and owner of an existing RIA. The language surrounding any restrictive covenants needs to be carefully considered by legal counsel prior to proceeding;
- Strategy around communications, including personal calls and meetings with clients;
- A tracking mechanism to regularly review progress on meetings, closings and asset transitions;
- Strategies for pairing clients with service teams qualified to serve the needs of these clients; and
- Construction and supervision of a team ready to troubleshoot challenges that may arise along the way.
Additionally, the transitioning advisor should be prepared to fully debrief the new advisory team prior to all initial client meetings. The more the new team can demonstrate knowledge of the client’s circumstances and confidence in keeping the client moving toward their goals, the more likely the client will transition successfully.
4. Technology and Infrastructure
Advisors must have a thorough understanding of the technology that will be used to service clients, as it is unlikely that it will be the same as the technology they previously used. Investment solutions should also be carefully analyzed as the new advisory team considers what should be maintained in the portfolio, in many cases to minimize taxes, and what investments should be transitioned. A CRM system can assist the entire team in managing the client relationships, especially in the critical early days of the transition. Finally, a tracking mechanism will allow all team members to keep close tabs on success metrics and opportunities to adjust the plans along the way.
5. Deal Structure
Often, advisor conversations on transitions begin with a focus on deal structure—but that shouldn’t be the first part of the conversation. Thoroughly understanding the transitioning advisor’s goals will naturally lead to the right deal structure. Will the advisor transition out of the business in six months or two years? Will they require full-time office space or utilize conference rooms for client meetings? Do they require salary and benefits for a period? Once these questions are answered, a deal structure that is beneficial to both parties becomes clear.
A successful transition starts with a thoughtful advisor who is willing to assess the circumstances and make the right choices for the future of their clients and team members. It also requires that the successor firm has the right team in place to support the process. When it comes together, the advisor can eventually step away with value from what they have built and peace of mind that clients will be taken care of for years to come. They will have fulfilled their planning obligations to their clients – and to themselves.
Jennifer Geoghegan is Chief Strategy Officer at The Colony Group
