The Coming Retirement Storm | Succession Planning

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Practice Management

A dearth of qualified advisors makes it essential that you identify a successor now and not wait until there are even fewer to choose from.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).

It's a good time to be a financial advisor. The market has been good, your services are in demand and club trips are back. Sure, there are some drawbacks—demanding clients, increasingly intrusive regulators and compliance departments and parent companies politely asking you to sell their wares—but so far, the positives outweigh the hassles. Keep your production high, clients happy and your nose clean with compliance and human resources, and you have job security. If you want to move, you've got recruiters beating down your door.

Demographic Downbeats
But a storm is brewing in your happy world and if you don't take steps to address it now, you'll find yourself approaching retirement with a serious problem on your hands. The problem? Demographics. The number of financial advisors in the wirehouses and the industry at large is shrinking with no turnaround in sight. Industry leadership is very close to panic stage and it's because of the trend lines.

Let's say your firm has 13,000 advisors. In a typical year, senior executives tell me that a wirehouse can expect around 4% "natural" attrition. This does not include advisors who are recruited away, but only those who are leaving the industry because of compliance or human resources issues, retirement, death, disability or lack of productivity.

Just to stay even, a brokerage firm has to hire 520 advisors a year. Throw in another 10% lost to competitors when a firm is under siege (like Morgan Stanley experienced post-Smith Barney merger), and you have, as Seinfeld would say, a major shrinkage problem.

Senior leadership is having a hard time keeping up with this natural attrition due to the fact that most of the big wirehouses have seriously curtailed their training programs twice in recent years—once after 9/11 and again in the wake of the 2008 crisis. Add to the scenario the abysmal success rate of the programs that remain. Training professionals inform me that 90% of trainees are no longer with the hiring firm after three years. There are a host of reasons why this is true (which I'll address in another column).

Unfortunately, another even bigger demographic wave is about to hit. Throughout the industry, the best advisors are retiring at a faster rate than they are being replaced. The average age throughout the industry is currently 57 and in 10 years, firms are expecting a retirement surge.

So, Mr. Big Producer, why do you care? Because you need to create a succession plan just like the one you encourage your business-owning clients to create, and you need to do it now. Why the rush? Because your succession planning likely takes one of three forms.

If you have enough money for retirement and you're happy to have your book serviced by "whomever," you could be planning simply to walk away. Or you could be planning to move now, while the deals are still big, and if you don't find a partner when the deal is up (typically nine years), then at least you got some equity out of your practice. Finally, you may be planning to find a junior partner, either at your current firm or at another firm, to take on your practice when you're ready to move on.

Of course, each of these options has problems. If you plan just to walk away, know this—clients who are not attached to a successor will spread to the wind once you retire. They will not stay with your current firm. That is brokerage firm Armageddon. You think that your firm will just give you a smile and a check when you retire? Read the fine print of that Retiring Advisor document: You must have a successor.

If you want to move now and extract some value from your book, this presumes that you are able to bring your clientele with you to the new firm and that you are willing to work for some length of time that honors your new contract. In other words, you will be selling your practice while still running your practice. But even in this scenario, you'll still need to find a successor when you want to leave your practice behind.

If you decide to find a junior partner, but start the process when you're getting ready to retire, you're walking straight into the down side of the supply and demand equation. Right now, that equation is your friend and allows you to continue to negotiate big deals when you move. But in a few years, when oodles of advisors are all retiring right along with you, the value of your book will plummet. Too many Big Producers like you "selling" their practices at the same time—that's Big Producer Armageddon. A flooded market means lower prices.

Need some more proof? Look up from this article. Take a slow look around your office. I'm betting that the advisors whom you would trust with your own money are the ones who are about your age. I'm also betting that the Big Producers who are under 50 are few and far between.

Figuring It Out
So what can you do about it? How can you find the "Mini Me," the person you will get along with and feel proud to introduce to your clients as your successor? Who will be the key to you getting equity out of the practice you have nurtured for all these years?

1. Look close to home. More advisors are bringing their children into the business. Your young adult children have been hearing about your ups and downs in the industry for as long as they can remember. Your passion may have become their passion. Advisors who have done this successfully tell me that they take enormous pride in watching their children take over the family business. Obviously, this solution is not for everyone.

2. Bring it up now. Talk to your branch manager today about wanting a successor. Your firm has as big a stake in this as you do. Common sense and industry statistics both tell us that clients who are not attached to an advisor or a successor are much more likely to move their assets away from their existing firm. Your branch manager is the best source for matching you with the proper young advisor. In a large office, the proper fit might be someone whom you have not even met.

3. Move to your successor's office. It's possible that your new junior partner is not in your office. Figure that out quickly. Because if the partner does not exist where you are, then moving is your only option to get equity out of your practice. If you let a prospective branch manager suitor know that you are seeking to partner up, the matchmaking can be part of the process. You will raise your marketability and your value if your new employer knows that there is a future to your practice beyond the length of the contract.

You are the CEO of your own practice and your shareholders are the ones you go home to every day after work. Have you planned for your succession to take care of your clients, yourself and your shareholders? You better start, before there are thousands of competitors all doing it at the same time.

— Danny Sarch



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