When failure to plan means leaving money on the table

More than one third of financial advisors plan to retire in the next decade – translating to approximately 109,000 individuals and 41.5 percent of the industry’s total assets. Planning to retire in the next decade and having a plan to retire are two very different things, and many advisors put off planning for their legacy and the future of their business until just a year or two before stepping away. 

But think about it: the advisor who sells their book of business the day before retirement is not only leaving money on the table but also setting up a difficult situation for their clients and successors. Clients are suddenly thrust into the hands of a stranger. Meanwhile, the new advisor must fight to retain clients with no prior relationship to buoy their efforts. The outflow of clients and assets under management can quickly devalue the company.

That’s why proactivity is the name of the game here. The most successful transitions require planning well in advance of ever being implemented.  

A staggering 58 percent of firms don’t have a succession plan – and they are already behind in terms of planning, as the value of an advisor’s firm is never higher than seven years before they retire.

Let me explain.

Lucky number seven

Transactions (mergers, acquisitions, sales) have become an attractive solution for many advisors for a variety of reasons, but transactions take time. For advisors thinking about selling their practice, the sale transaction can take anywhere from one to two years to finalize. The deal close is only the first part. From there, the true transition begins, and advisors need to help clients and second-generation advisors get acquainted by working at the larger firm, which also takes time.

Now, think about the company making the acquisition. Growth is the name of the game. These companies are looking for firms that fit their overall growth strategy, so before they enter any deal, they want to feel confident in the advisor’s future growth. When a firm shows strong organic growth and the founder plans on staying involved, an acquirer can financially model that growth continuing. If the advisor plans on exiting in the short term, that confidence won’t be there.

From our experience, advisors that start the process seven years out get the most favorable valuations. Consider this: Without a plan, market conditions and firm valuations can worsen, creating uncertainty for the retiring advisor, their staff, and clients. A firm that is losing assets or seeing more in distributions is theoretically worth less tomorrow than today.  

Taking the guessing game out of it by starting early allows everyone to feel secure and confident in the transition plan. Remember, it’s not just about the clients. Second and third generation advisors, back-office staff, support staff – all of these individuals have skin in the game.  

This is why the deals with the largest upside for both seller and buyer are the deals where advisors agree to stay on for a few years to steady the ship and continue facilitating the business’ growth before retiring and handing the reigns to their hand-picked successor. 

Flexibility is key

However, not every acquiring company thinks and acts the same. For advisors, working with a partner that’s flexible is crucial. Many advisors – especially those further in their career – have established processes and ways of working. Look for companies that have different types of partnership options to find a transition path that works for you, your staff and your clients.  

For example, some companies exclusively want to acquire and fold the advisor’s practice into their larger book of business. For some, this approach will work. For others, this type of blanket acquisition takes away from the nuance of their client relationships. But for those seeking a more collaborative transition, they need to plan, and plan early. 

Succession planning is more than just a necessity: it’s an opportunity. Advisors who act early will ensure they maximize their business’s value and pave the way for a smooth and prosperous transition. 

Michael Belluomini is the SVP of Mergers and Acquisitions at Carson Group, an RIA with more than 40 billion in assets in management, serving more than 51,000 families.