Life is a constant juggling act for advisors between managing clients, a book of business, and firm needs that there often isn’t time to evaluate next generation (or succession) planning. Today, however, planning ahead is top of mind for advisors for a variety of important reasons with mounting interest in determining if being an employee of a big firm is the optimal solution or conceivably the option to go independent.
Financial advisors spend 30-40 years working tirelessly to build a book of business. The effort is commendable and so much is invested. All the client care is expressed in many ways – advisors are trusted and respected and even let into the inner circle for family events – marriages, deaths, graduations – you name it. As advisors near the end of their career, it is important to consider legacy planning. Many advisors have spent the bulk of their careers at big wirehouses where the simple solution for retirement is normally to accept the firm’s retirement policy, be it Merrill Lynch, Morgan Stanley, Goldman Sachs, or others. It is almost assumed that one has to accept the default option, but for advisors today, the great news is that they don’t need to just settle for 2.5x W2 income as is the case at most of these firms.
Advisors must consider who will take over the practice upon retirement. Will it be a family member or perhaps an advisor the senior advisor has prepared for the role? With dwindling numbers of younger advisors, and baby boomer advisors retiring at a rapid clip, there is more pressure than in the past to find the best fit amidst a compressed pool, pushing advisors to think strategically about their options further in advance. Depending on the vision for who assumes the book of business, it may or may not inform a potential move to a different option in lieu of retiring in place at a big wirehouse.
When an advisor plans to retire, the following considerations are important:
- There is a monetization plan for the senior advisor.
- There is a succession plan where clients experience as little interruption as possible and have been told in advance what is going to happen, ideally meeting the next generation advisors early on.
- Given that senior advisors often have a book of business with clients around their own retirement age, it is recommended that in the years approaching retirement, advisors attempt to capture some younger generation business as older clients retire or pass, generational planning is advisable.
Wirehouses, in general, require a next generation advisor to undertake the business, oftentimes the firm assists an advisor in finding a suitable match to retire in place at the firm. For many, the search is made easy as many advisors work on teams in which there is already an advisor on board that can manage the book of business. It is important that an advisor find a match with the level of sophistication clients are accustomed to, this is sometimes challenging in smaller markets. Advisors can seek out a replacement on their own within the firm or try to recruit an advisor in, both options obviously are more time intensive for the advisor but perhaps might yield a closer match to suit the practice needs. Some advisors even opt to work as long as they can because they feel the retire-in-place plans are so challenging, that they go as far as they can, and let go of a monetization plan.
What if wirehouse advisors don’t like their in-house options? There are several alternatives. Advisors can consider the option to move to a new W2 model firm. A retiring advisor can potentially receive an equal or greater retirement package at a competitive firm of 250%+, stay a few years at 350%+, most after only 5 years LOS, while also receiving 350-400%+ to transfer the book to the new firm. A total payout can reach 600%+.
Advisors can also opt for independence in which case they have the flexibility to create their own succession terms and timeline between the advisors (not the bank) and at a market value of 4-6x topline revenues at LTCG versus 2-3x ordinary income in the wirehouse world. The benefits for the next generation advisor taking over the book is to set them up for ownership also, and avoid the complicated stipulations of big firms such as non-solicitation, loss of control, and potentially loss of financial payouts with the condition that the firm will find them a proper successor.
It can also be the case that an advisor out and out sells his or her practice to an independent RIA for large multiples of gain at LTCG. This option yields the best valuation option and tax treatment with the greatest flexibility on dates as the advisor so desires. Advisors can maximize the sale price of their practice in the independent space, for example, a single advisor could see multiples of 6-8x, a team of 3-4 could yield 10-12x, and large enterprises can yield upwards of 16-20x as 1099 tax optimized income.
Ideally a move should be made at least 3-5 years prior to retirement date to find a suitable match and to define the succession plan to ensure smooth sailing for clients. For advisors considering retirement, the decision to retire in place at a big firm, move to a new big firm with a successor defined, or going independent and capitalizing on larger multiples is a personal decision. In evaluating the options, advisors should not undervalue their life’s work and ensure that they are remunerated properly in retirement for the hard work they’ve performed over years.
As the Editor of The Gershman Group, a boutique financial services consulting firm, TGG brings expertise in financial analysis, strategic planning, and market research. With a keen eye for detail and a passion for helping businesses navigate complex financial landscapes, TGG delivers insightful, high-quality content to empower informed decisions. Backed by years of industry experience, TGG makes complex topics accessible through clear and compelling communication, shaping the firm’s thought leadership and commitment to excellence in financial services.
