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Dos and Don’ts of Passing Down Your Practice

The average age of financial advisers in the U.S. has climbed north of 50 years old and approximately 43 percent of the total population of advisers are between ages 55 and 60. With so many advisers nearing retirement, the industry is facing a crisis when it comes to succession planning.

Typically, when the owner of a financial advisory practice wishes to retire, they’re faced with one of two choices: they can sell their firm to an institutional buyer, such as an RIA rollup shop, private equity firm or a regional acquirer; or they can bring in a junior partner and gradually introduce them to his or her clients and transition the book of business over bit by bit.

Ideally, firm owners prefer to transition their book of business to a junior partner over a five- to 10-year period. However, throughout my career helping small business owners transfer ownership of their firm and retire, I have found that financial planners ironically have some of the worst track records when it comes to successfully planning and executing an ownership transfer.

In this light, here are a few dos and don’ts when transitioning ownership of your business to a younger partner:

Don’t delay. It’s never too early to start the succession planning process, which can take more than a decade from start to finish. It takes years to introduce a new partner and provide them with the training and resources necessary to keep the business afloat. Too often do I see advisers continue to work into their senior years only to realize they have no exit strategy in place. Consider your clients; who is going to take care of them after you leave? And how are you going to monetize the business you’ve worked to build over the course of a lifetime?

Do get your younger partner involved in discussions and meetings with your larger, more significant clients throughout the transition process. Junior partners are typically brought on initially to handle an adviser’s smaller accounts. While this is all good and well in the beginning, it does not provide the new owner with the proper experience and training required to serve the bigger clients, which will be one of their primary responsibilities once ownership is transferred.

Don’t forget about the intangibles like the management style, likeability and cultural fit of the new owner. Some financial advisers still run a very formal shop with pressed white shirts and systemized client communication techniques. Others are more comfortable in khakis and a polo shirt, and prefer a more casual style of correspondence with clients. Also, does your new partner fit in well with other employees at the firm? Making sure you two see eye to eye in these categories can really smooth out the transition process, both for yourself and your clients.

Do go over the company’s financials. Not only must you teach the new partner how to handle your clients, you must also teach them how to run a business. What size client is most profitable? How does the business manage its costs? How do we manage the staff? Many new business owners overlook these extra responsibilities, which can be overwhelming at first. But as the outgoing partner, you need to make sure the business is left in a position to remain profitable. Typically, selling advisers are paid out in installments. If the business fails, these payments could stop, leaving the outgoing adviser in a sticky situation.

Don’t think you won’t need outside help. Hire a team of lawyers, accountants and even a management consultant to delegate the distribution of responsibilities throughout the process. Many times the incoming owner wishes to take over more responsibility at a faster pace than the retiring adviser is comfortable with. Management consultants go a long way in easing this tension.

Do be open to some degree of change. Relinquishing your power and watching the business you spent years creating change in front of your eyes can be a difficult pill to swallow. However, standing in the way of the new adviser’s vision will only muddy the process. You must accept that some aspects of your business are going to change under new ownership. The sooner you come to terms with this reality, the better.

No matter how much you plan, transitioning your business will almost inevitably come with a few bumps in the road. However, following this list of dos and don’ts will put your firm in a much better position to smoothly and successfully navigate the transition. Many of your clients have worked with you for decades, and you owe it to them as their financial adviser to ensure their financial futures are maintained. The first step in doing so is to make sure your business is taken care of after you’re gone. So take this transition process seriously and start early. Your clients’ well-being depends on it.

 

Stephen Brubaker

Stephen Brubaker CFP® is president and wealth management adviser at Exit & Retirement Strategies, Inc. He holds his bachelor of science from Miami University in Oxford, Ohio.