A great deal has been written about succession planning over the last two years. Most of it focused on selling your practice to either a younger version of yourself or merging into a larger firm and transitioning your clients over a period of time. Clearly they are options, but they may not be the best options. We believe you are better off redesigning your practice to accommodate your lifestyle – perhaps a retirement lifestyle – and continuing to run your practice for many more years before considering a sale.
Indeed, advisors are getting older: Cerulli puts the average age of advisors at 52 and some 40% of advisors are over age 55. And while advisors regularly counsel their clients to do succession planning for their own businesses, advisors have been remiss in following their own advice. A 2011 FA Insight Study determined that only 18% of advisors surveyed have a succession plan in place. At Pinnacle, we have spoken to hundreds of advisors over the last several years and in our estimation the number is far, far lower than that.
Watching this trend with great anticipation are the consolidators. They hope that many of these firms will decide to sell to them. And a good many advisors without a plan in place may be counting on them to be there to bail out their poor planning. That may be a reasonable expectation for larger advisory firms, but, quite frankly, few large firms are interested in acquiring advisors under $100 million in AUM.
But all is not lost. Indeed, we think this narrative overlooks a better alternative. An alternative better suited to the aspirations of the advisors we have been speaking to over the last few years. One where advisors continue to work with their clients well into their sunset years without sacrificing lifestyle. And given the expanding list of business solutions now available to independent advisory firms, we think this opportunity is absolutely plausible. Hear us out on this one …
- Advisors consistently tell us they love their clients and that their preference is to continue working with them well into retirement. In most cases, these relationships have grown well beyond the traditional client-advisor relationship. They are friends and an important part of our lives. We don’t want to give them up.
- Advisors tell us they still love finding planning and investment solutions for their clients. That is the work that drew us to wealth management in the first place.
- Wealth management is a profitable business with exceptional annuity characteristics if operated well. And it’s one of the few careers that we can continue to pursue well into retirement as long as our interest and our mental acuity remain strong.
- The most common complaints are (a) that the operational, administrative and compliance issues are wearing them out, and (b) that the growing demands of investment management are making the job more difficult, more stressful, and less enjoyable. Moreover, these activities are taking more and more time from client facing activities.
So if we could present a model that allows an advisor to continue doing what they love with the clients they love, as well as provide the best opportunity for financial gain, why would you want to sell your practice for what you could take out of it in 3-4 years?
Imagine for a minute that you no longer have to manage assets, build reports, handle technology issues, implement billing and deal with many compliance issues or even manage people. Your only job is to manage relationships you enjoy, communicate your expertise on the “managed portfolio” and provide financial advice. And imagine you can do this for as long as you wish and far exceed the revenue you would receive if you sold your practice outright. Wouldn’t you consider this alternative?
Let’s look at the math in a simple example …
Plan A. Sell Your Practice
AUM $40,000,000
Recurring Revenue $400,000
Recurring Expenses $175,000
Annual Net Income $225,000
Assuming an installment structure involving a 60% down payment, a 3-year 20% note and 20% retention, the approximate buyout value may be $675,000. This of course will require that you stick around for three years. You will be paid a salary for this transition period, however, it will probably be half of what you are taking out. If all goes well you will pull approximately $1 million gross from the sale.
Plan B. Redesign Your Practice
AUM $32,000,000
Recurring Revenue $300,000
Recurring Expenses $100,000
Annual Net Income $200,000
Alternatively, let’s hold on to the practice for 10 more years with a completely modified role and then sell. You will not manage assets, you will be minimally engaged in operations, compliance will be streamlined and reporting and billing will be done for you. You will drop the ten clients who create the most stress and cut your work week down to three days at most. The total take for a very lifestyle oriented practice like this one will be close to $2.5 million dollars – a much better take home than selling today even after taking into account a much more lifestyle driven practice.
Clearly, if you can fine redesign your practice to meet your lifestyle goals and you still enjoy spending time with your clients (without some of the stress), this might be the perfect solution for you. Our goal at Pinnacle Advisor Solutions is to provide you the support to achieve an outcome just like this.
