On paper, extended succession plans, like Merrill's recently announced CTP, are not the same for retiring advisors as for heirs. However, the reality is more nuanced.

Merrill is not alone in offering a retirement program like CTP. All four offices have similar programs (also referred to as sunset deals or internal legacy deals), each designed to reward advisors for their life's work and to connect them, their clients, and to inherit future generations in the firm.

As a result, office advisors, as they contemplate the end of their careers and whether or not they've previously monetized their book, are increasingly faced with a conundrum: Should they accept their firm's deal to retire or move their book elsewhere?

Notably, there are pros and cons to these arrangements for both retirements AND successor advisors of the next generation. On the one hand, retirement programs allow senior advisors to “hit the easy button” and cash in on the book without the hassle or risk of a transition. On the other hand, these deals are often done for much less than “fair market value” and, more importantly, they come with real teeth and strict restrictions, especially for the next-generation heir to the book.

So how should advisors think about these deals, which are now being offered earlier and more aggressively than ever before?

The good

1. Money, money, money: Let's not get the plot mixed up: strong sunset deals offer retired advisors the ability to put real money in their pockets in exchange for just sitting around. In many cases, these deals can reach 200-300% of an advisor's trailing 12 month earnings.
2. Security and Stability: Beyond the dollars and cents, these deals provide peace of mind for advisors and clients alike. They do not need to move assets, and it is effectively risk-free as there is no major transition involved.
3. Rapid growth: For the next-generation advisor, being the recipient of a sunset deal is a tremendous way to turbocharge. It is the equivalent of adding inorganic growth through M&A. In fact, many advisors in growth mode will make this a repeatable part of their growth strategy (ie, becoming sunset program recipients for as many advisors as possible).

The bad

1. Motives may not be pure: These deals sound like a no-brainer on paper. Why wouldn't an advisor do a massive check for little or no risk? However, the fine print reveals a more complicated story: Merrill (and their network peers) use these strategies as their primary conservation tool. These programs are often billed as a retention strategy – one that effectively binds advisors and clients to the firm for the life of the deal (typically 5-7 years).
2. Money, Money, Money, Part II: While it is true that sunset firm programs offer advisors the opportunity to monetize their book for significant amounts, these deals are, in reality, well below “fair market value.” An advisor can easily earn more for their book at the end of the day if they have the appetite to make a transition – either through a recruitment deal from another traditional firm or by creating a competitive bidding process and selling their book with treatment of capital gains in the open market.
3. Paying for nothing: There is no such thing as a free lunch. The next-generation legacy advisors who are the recipients of these programs end up paying for a portion of the business out of their own pockets through an ongoing payout reduction in the legacy book. That's great until these next-gen folks realize the harsh reality: At the end of the sunset deal, they don't really own anything—since the assets belong to the firm.

The damned

1. Limited option: We often say that no counselor is ever stuck. However, the only exception may be the recipients of sunset agreements (ie, the heirs of the next generation). Because these deals come with heavy restrictions and lock-ins, they severely limit optionality for the next 5-7 years. (We've seen some cases where advisors bound by sunset deals choose to break the contracts and leave their firms before their obligations are completely waived, but it's expensive and riskier to do so.) . It may be perfectly reasonable for a team to commit to the status quo for the near term, but it's essential that both retiring advisors and successors are confident they can live with whatever changes the firm adopts for longevity of the agreement.
2. Without medication: Wirehouse advisors often have frustrations and pain points that seem to get worse every year. Pressures to sell products, overly strict compliance regimes, restrictions on hiring additional support staff, … the list goes on. And while sustainable sunset deals certainly serve to monetize the book in a meaningful way, they don't solve anything else. In fact, they can make life more difficult for the legacy advisor because the firm knows they are essentially stuck.

As our analysis illustrates, the answer to the sunset deal conundrum is not straightforward. Should you take the deal? It really depends on what you value more (ease of staying put vs maximizing enterprise value), how connected you are to the future direction of your firm, how much you care about your next generation and your customers, and a host of factors others.

Jason Diamond is Vice President, Senior Consultant of Diamond Consultants – a nationally recognized recruiting and consulting firm based in Morristown, NJ that focuses on serving financial advisors, independent business owners and financial services firms.