The wealth management community has a massive next-generation talent gap, and it's getting worse every year. Wirehouse advisors with no obvious or natural successors are particularly vulnerable and this affects their ability to monetize their life's work when the time is right.
These counselors face a unique dilemma as their careers wind down: Who will “take them out?”
By “outsourced,” we mean two distinct but related functions: providing a money-making event for the senior (retired advisor); and providing a continuity plan where customers can continue to be served with little or no disruption or friction.
So how do councilors reconcile this issue without such an heir apparent? Here are six possible ways and the pros and cons of each:
1. An arranged marriage: Since sunset programs (also known as retirement programs) require a next-generation “successor,” the easiest solution for advisors in this position is to simply let the firm's management find a successor for them. There's likely no shortage of next-gen advisors who are hungry to take on a quality book.
The pros: This allows an advisor to walk the “path of least resistance.” It is relatively risk-free and does not require any transition risk.
Disadvantages: Advisors in smaller markets may struggle to find a quality successor, even with the firm's help. Larger advisors may not have the next-gen, savvy advisors with the necessary sophistication to service their books. Finally, this move ties the retired advisor's legacy to their current firm.
2. Actively seek the next generation: One issue that advisors have with allowing firms to find them a successor is that firms are notoriously bad at doing so and are not particularly proactive about it. So some advisors feel that it is their duty to find an internal successor themselves.
The pros: If they successfully find a quality successor, the adviser can enter into an agreement with their chosen successor as recipient.
Disadvantages: This is hard to do well. If it were easy, advisors wouldn't be facing this challenge in the first place. Also, it usually means fishing in a limited basin (ie, their current tributary or complex, or perhaps the region).
3. Do nothing: Some advisors feel that current retirement programs are too onerous for both retiring and inheriting advisors. These advisors can run the business until they can't or don't want to anymore and then leave.
The pros: It's liberating and certainly a way for an advisor to come out entirely on their own terms. It also requires as little planning or advance work as possible.
Disadvantages: This does not allow the advisor to make money in any way, shape or form. They are essentially walking away from their life's work. It also doesn't offer any sort of succession plan for clients, who would likely be forced to switch to a new adviser or firm.
4. Find an external successor: If there is no logical successor in house, an advisor may look outside to other firms to see if they can coerce or recruit another advisor to join their current firm. Often, the promise of inheriting/taking over a meaningful book is enough to make a future generation consider joining the firm.
The pros: Apparently, this gives advisors a much larger pond to fish in and they can find someone with similar values and customer service models. The next generation advisor who joins the firm gets a good recruiting deal and becomes the successor to a book of business. Retired counsel can now enter the firm's sunset program.
Disadvantages: It is difficult enough to identify a potential successor and even more difficult to convince them to move to their firm. As such, it will likely last longer than some of the other options on this list.
5. Changing to a new W-2 firm: If the advisor does not have a quality successor at their current firm, perhaps switching to another firm will enable them to find one. It's essentially a new pond to fish in, and the burden of finding a successor falls on the recruiting firm. A counselor who is coping has real power. They can tell the new firm, “If you want to win my business, you need to find me a quality successor before I walk in the door.”
The pros: This move allows advisors to “move once, earn twice“since they will receive a transition agreement from the new firm and can then enter that firm's retirement program. Also, if an advisor has frustrations with their current firm, the move can have other positive side effects – such as improved client experience, technology, investment platform, etc.
Disadvantages: This is a transition and one that comes with risk, friction and potential portability issues. Also, it will likely extend the sunset time frame a bit. An advisor who wants to move to a new firm and then retire will likely face a minimum of 3 to 5 years before they can seriously consider leaving.
6. Take the leap to independence and then sell the business on the open market: This requires the most effort, but the most profitable advantage. Once an advisor makes the leap to independence, they can sell their book for a substantial amount and for a long-term capital gains treatment. The acquiring firm becomes the successor.
The pros: In addition to the benefits of appreciation premium and tax treatment, this move allows for greater customization and flexibility with the “when and how” of the glide path to retirement. Wirehouse sunset agreements are quite rigid in what they allow in terms of timing, so these transactions present an attractive alternative for advisors who are not yet ready to choose their retirement date.
Disadvantages: First, the advisor must transition to an independent model like an RIA, and then they can sell. As such, it requires more time, effort and risk. Also, finding a buyer who is culturally, philosophically, and otherwise aligned can be challenging.
As these examples illustrate, there is no perfect path for a non-successor advisor to retire. That's why it's important to consider a solution early and often – even 10 or 20 years before retirement.
But even sole practitioners without next-gen have quality options – whether they're within their current firm or not.