Best time to retire is 59, expert says

The magic age at which an adviser should exit the business is 59, according to a succession-planning expert.

By 59, an adviser’s maximum annual growth rate has peaked and is coming down, David Grau, founder and president of FP Transitions, said during a session at the Financial Services Institute Inc.’s adviser conference in Washington last Tuesday.

“By that time, we’re not working so hard anymore, and if you’re going to get out, that’s the time to do it,” he said.

The peak annual growth rate occurs for advisers between 45 and 55, said Mr. Grau, whose company completed business valuations for about 1,000 firms last year. The average value of firms was about $1.5 million.

And advisers looking for the greatest payout for their business should develop a team of internal investors who take over the business slowly, Mr. Grau said.

Founding advisers ultimately can generate about six to seven times the firm’s gross revenue with an internal succession, compared with an average of two times the previous year’s earnings for advisers who sell their businesses to outsiders, he said.

Maximizing value

“The best value is internal, not external, succession,” Mr. Grau said. “The key is building a practice that takes care of you until you don’t want to work anymore.”

Financial adviser Jim Guyot said his firm, Lighthouse Financial Strategies, is considering whether to form an S corporation as a first step toward creating a business, not just a practice. Lighthouse includes several advisers, but each works independently and has his or her own staff.

Mr. Guyot, in his early 50s, said he doesn’t think 59 is the right age for him to exit the business, and he may never really retire.

He would, however, like to develop an internal succession plan, possibly eventually incorporating his two teenage daughters.

“Who knows what the future brings,” Mr. Guyot said. “But I’d like to build a firm with enduring value.”

Advisers should establish incentives for key employees to invest in the company through a portion of profit distributions, Mr. Grau said at the FSI conference.

That way, the next generation is buying out the owner over time while still earning a salary that pays their bills.

Team of professionals

This creates a team of professionals to take over the firm from the founding adviser, Mr. Grau said.

Typically, younger planning professionals don’t want to put out their own shingle, in part because they don’t want to work 60 hours or more a week — the way they have seen founding advisers do over the years.

Younger professionals at advisory firms have been receptive to the idea of ownership through a portion of profit distributions about 80% of the time when approached with this concept, which admittedly will require them to sign promissory notes of at least 10 years’ duration, Mr. Grau said.

Kendra Thompson, a consultant with Accenture Wealth and Asset Management Services, said one of the best things firms can do for their advisers is help them build teams.

“That team isn’t just about succession; it’s about growth,” she said.

Building an advisory business requires a deliberate strategy and usually takes more than 10 years to do it right, Ms. Thompson said.

But employing a team for growth and internal succession isn’t for everyone. For some advisers, there is more to life than getting top dollar out of their business in the end.

Bernard Kiely, founder of Kiely Capital Management Inc., celebrated his 65th birthday last week but plans to work at least five to 10 more years. He and his wife, Yvonne, the vice president and treasurer, are the firm’s only employees — and Mr. Kiely plans to keep it that way.

“If we work 10 more years, we will earn about $3.25 million, and then when we want out, we’ll sell for whatever,” Mr. Kiely said. “I have a lifestyle practice — to me, this isn’t work.”