How retiring advisers can avoid going 'shoeless'

There will be a lot of shoeless financial advisers in the coming decade. Metaphorically speaking, of course.

More than 111,500 financial advisers will retire over the next 10 years, according to Cerulli Associates. And like the ancient tale of the cobbler's children ironically having no shoes because their father was too busy making shoes for his customers, an unhealthy percentage of those advisers will be unprepared for this massive life change, even though they've spent most of their lives helping clients prepare for the very same transition.

More than half (56%) of advisers plan to retire between ages 65 and 75, with an average age of 69, according to Cerulli. That said, only 27% of advisers report having a plan to transition their business and only 22% of those rate their plan as “perfectly clear,” according to a Janus Henderson study.

That’s a lot of uncertainty over what is likely an adviser’s most valuable asset, not to mention the engine that created all that wealth.  

“While advisers may have other plans in place, as they seriously start to plan for the next phase of their lives, they must figure out the best way to maximize the value of their practices and find the right partner to address their needs and, importantly, those of their clients,” said Thomas Goodson, president and CEO of The AmeriFlex Group, a hybrid RIA based in Las Vegas.

WHY DON'T FINANCIAL PLANNERS PLAN AHEAD?  

There are many reasons why financial planners fail to heed their own advice when it comes to retirement and transition planning. Tina Downing, senior director at Russell Investments, emphasizes some of the excuses for procrastination, including concerns about giving up control too soon, uncertainty over where to start the process, worries over where and how to find a successor, and hesitancy surrounding the timing.

“Sometimes you have situations where you’re so busy planning for your clients that you put your own retirement planning on the back burner,” said Steve Kelley, managing director at Choreo Advisors.

Kelley said another reason that advisers often dawdle when it comes to charting out their own retirement plans is the fact that wealth planning is the type of profession one can perform for a long time.

“You could be in your 70s and still work as a financial adviser, perhaps with a smaller set of clients. In that case, the 'where does the income come from?' focus of retirement isn’t as much of a priority because you’re still generating income,” he said. 

THE 'ONE FOOT IN, ONE FOOT OUT' ADVISER

The fact that many advisers’ self-identity is so intimately woven into their profession is another cause for their lack of transition planning. This psychological and emotional link makes the shift that much more difficult. It also often leads to what Matthew Sommer, head of Janus Henderson Investors' defined contribution and wealth advisor services team, calls the “one foot in, one foot out” adviser.

“These aging advisers come to the office less often, communicate with clients less frequently, and may not be as familiar with new products and other innovations occurring in the marketplace compared to their peers,” Sommer said.

While on the surface this part-time arrangement seems like an ideal way to transition into retirement, the value of the adviser’s practice diminishes over time as older clients pass away and aren't replaced with younger, newer clients, he said. Simultaneously, existing clients are left wondering how closely their accounts are being monitored and, ultimately, whether it may be time to start looking for a new adviser.

To avert this crisis, Sommer suggests adding a newly designed succession plan as an agenda item to upcoming client meetings and portfolio reviews in order to prepare clients for coming changes in management.  

HANDING OFF THE BUSINESS

Ownership of a wealth management practice can be transferred in a multitude of ways. A financial adviser could sell it to a third party, transition it to a junior partner or gift it to a family member. The common denominator for a successful transition, however, is finding the right fit.

Janus Henderson’s Sommer cites a study by Cerulli Associates that identifies the three attributes most important to a retiring adviser handing off his or her business as the likelihood the successor will put the client’s best interests first, their personality, and regulatory and compliance records.

“Interestingly, attributes that are less important include investment philosophy, fee structure and geographic location,” he added.

Given that the process of finding a suitable successor will likely take longer than expected, Sommer suggests starting the search early. Once a successor is chosen, advisers can take steps to ensure a smooth transition.

“Both advisers can participate in meetings as a way to build rapport and ease the client’s transition experience,” Sommer said. “If the successor is a younger adviser, he or she would benefit from the retiring adviser’s mentorship.”

TheAmeriFlex Group’s Goodson highlights “flexibility” as the trait most valuable in a potential partner.

“We’ve seen those willing to provide the most options to retiring advisers have the most success. These deals range from an immediate and complete sale, to equity or revenue-based partnership agreements aimed at an eventual sale. These kinds of deals provide financial security and peace of mind to advisers concerned about their legacy and how their clients will be treated after they retire,” Goodson said.

Flexibility, however, has its limits. The transitioning adviser must understand that postponing their retirement date past the agreed upon timetable may cause frustration for the successor.

“If somebody is looking forward to assuming a leadership role in the practice and that role is suddenly taken away, that could cause a serious problem going forward,” Sommer said.

DO AS I SAID, NOT AS I DIDN'T DO

Once the baton has been passed and the practice entirely transferred into new hands, the retired financial adviser faces one more very important step, and that is managing — and not outliving — his or her own portfolio.

“Having a diversified portfolio and owning a good mix of the various asset classes tends to perform better in the long run. Making a few large bets on risky stocks or strategies can ruin a portfolio and can result in a permanent loss of capital,” said Dave Totah, partner and senior wealth adviser at Exencial Wealth Advisors.

Totah also offers some money management rules that should be familiar to nearly all advisers, such as keeping an emergency fund of 3 to 6 months’ worth of living expenses on hand, living below your means and avoiding overextending yourself, and paying off credit cards in full every month. 

“Have discipline around spending," he said. "Less spending is more saving.”  

Faron Daugs, a wealth adviser at Harrison Wallace Financial Group, said he's been looking at more income-generating investments as he approaches retirement, in addition to passive income opportunities outside of the public markets, such as rental real estate.

Daugs also appreciates a second opinion so as not to succumb to overconfidence, an affliction that affects many financial advisers who choose to manage their own money in retirement.

“I have a colleague whom I trust greatly to review my portfolio and planning projections every two years. I believe ‘peer review’ is an important aspect in our industry, to ensure we avoid tunnel vision with our own planning, investments, and potential opportunities,” he said.