Practice Management

Will there be buyers when you sell?

A confluence of factors in the advice industry is prepping a 'perfect storm' for succession plans

Mar 22, 2015 @ 12:01 am

By Joni Youngwirth

In the fall of 1991, a nor'easter barreled through the Atlantic and absorbed Hurricane Grace, creating a devastating storm that wreaked havoc along the East Coast of the United States. Though perhaps not as dramatic as the situation depicted in Sebastian Junger's “The Perfect Storm,” a practice management storm is brewing in our industry today, and it could prove dangerous for advisers who are looking to sell a book of business in the coming years.

None of the three components of the storm will come as a surprise to anyone, but their confluence should raise concerns among advisers who don't have a succession plan.

1. Baby boomer advisers (and their clients) are aging. The average age of the roughly 315,000 financial advisers in the United States is 50.9. Forty-three percent are over the age of 55 and nearly one-third are 55 to 64 years old. Many of these advisers' businesses could be described as lifestyle practices, with an emphasis on serving existing clients rather bringing on new ones.


Even when tenured advisers seek to add new clients in the accumulation stage, they may find that younger clients are looking for a younger adviser who's likely to outlast them.

Pre-retirees and retirees, on the other hand, are relatively easy clients to come by since they actively seek help with retirement distributions. From a revenue-per-household perspective, they're financially attractive clients, but 40-somethings in the accumulation stage are critical for firm growth.

2. The industry isn't attracting next-gen advisers. For every eight advisers who retire, only three are trained to fill their shoes. And for every graduate of a financial planning program who enters the industry, two advisers become eligible for Social Security.

What's more, the advisers who are entering the industry generally don't start out the way the boomers did. The requisite three years of experience to gain the certified financial planner certification, for example, is a shift that has contributed to the consolidation of practices, and many younger advisers aren't in a position to purchase a book until later in their careers. Established advisers are far more likely to have the capital for a down payment on a practice.

3. The shift from solo to ensemble practices. Although 54% of the industry remains in solo practices, the trend toward ensembles is clear. A solo adviser may sell to another solo adviser, but it's far more likely that solos will be selling to ensembles in the future. And the more times a firm purchases a practice, the more discerning it becomes as a future buyer.

Fifteen years ago, all that glittered was gold when it came to buying an advisory firm. Everyone wanted to buy a practice, any practice. Today, too many clients, too few clients, too many older clients, or too many clients who generate too little revenue per household are all reasons to either steeply discount value or avoid purchasing a practice altogether. As a result, the 70-year-old solo adviser with 80-year-old clients may well have difficulty finding someone to take over his book.

Of course, the outlook is far brighter if the adviser also has clients' children as clients. Unfortunately, though, that's seldom the case, with a mere 2% of children keeping their inheritances with their parents' financial adviser.


How prepared are you?

Only 25% of advisers have attended to continuity planning, a serious red flag for the industry. If you're one of the many who haven't yet put a succession plan in place, ask yourself the following critical questions:

• -Are you over 50 years old?

• -Do you run a solo practice?

• -Is the average age of your A and B clients 60 or higher?

• -Is the average age of your book climbing as clients pass away and are not replaced by younger clients in accumulation mode?

• -Are assets likely to leave your practice when your clients die?

The more times you answered “yes,” the more intense the approaching storm may be for you — and the sooner you should take action to avoid becoming a casualty.

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.


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