A plan for yourself is a plan for the future of your firm

I was recently speaking with a financial adviser who was disappointed that his long-term clients no longer sent him referrals.

As we spoke, I asked him why. He thought it was because of his age.

His reply caught me off guard.

I don’t think any of his clients are practicing age discrimination, per se. In fact, most of his clients had been with him for decades and were of the same demographic.

But I do believe that they're concerned that he may not be around in the future to help when they need him.

The adviser's original succession plan had been to sell his practice to an aggregator when it was time to retire. When he was younger, he thought he’d retire by age 60 or 65. But as he reached those ages, he found that he still enjoyed working with clients, which, frankly, isn’t terribly taxing.

What was most frustrating for him was that his business had stopped growing. Sure, it had been helped some by the rising market, but given that no organic assets were coming in, and clients were spending down some of their savings each year, his business was measurably contracting.

What options does this adviser have moving forward? Well, he can continue on his current path, focus on reducing expenses, and pull out as much profit as he can. If he lives a long time, although it’s probably not in the best interests of his clients, for him, at least financially, this may not be a bad way to go.

Another path he could pursue would be to bring in a younger adviser to help service his clients. In fact, if he does this, it’s likely he’d begin seeing new assets flowing into his firm. After a few years, assuming the business is well run, the added revenue from new clients could offset the cost of the adviser. To protect against his death, a buy-sell agreement could even be put in place to determine a price, though finding the assets to fund the purchase could be a challenge.

A third option would be to sell to a larger advisory firm and continue serving his clients until he retires. This would monetize the value of his practice today while enabling him to remain engaged in meaningful work. 

If you're at a similar stage in your career, maintaining the status quo might be an acceptable path, but it would be worth your while to consider alternatives while you're still relatively young and have your health.

Which leads me to the following: At 160 completed transactions, and with a full quarter to go in 2021, the first three quarters of this year have already broken the record number of transactions (159) we saw for the entirety of 2020.

The No. 1 reason given for the increase in transactions is the desire to create a succession plan.

With that in mind, when it comes to planning, what works for one adviser may not work for another. What is apparent is that advisers are understanding that they must do something to create a desirable future outcome for themselves, their employees and their clients.

Having seen the chaos that results when advisers unexpectedly die or suddenly retire, the biggest mistake they can make is to not have a plan in place for the future of their firm.  

[More: Stop devaluing your business]

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $13 billion in AUM.