'If you’re not having this kind of conversation with key clients, you’re avoiding the elephant in the room'
Advisors expecting to retire in the next few years should be planning to maintain business values amid the expected mass exodus, according to an industy insider.
“If you look forward at what’s happening in advisor demographics, we’ve having more advisors approaching retirement age. I think there are almost $300 to $400 billion of assets managed by independent advisors reaching a retirement age in the next few years,” John Novachis, executive vice-president of growth and development for Investment Planning Council (IPC), told Wealth Professional.
“There is not a lot of young blood in the next generation of advisors coming in, so how do you mitigate for that? You have to make sure your business is the best of the crop. So, you need to ask yourself: would you buy your business at a premium value, and would it run without you? If we apply supply and demand as well, when there is more supply – or more advisors coming to a stage where they need to exit the business – buyers will become choosier and, ultimately, business values could go down as there are more choices available, more supply than demand. So, it’s very important that advisors do that planning and do it early.”
Novachis suggested advisors start by ensuring that they have a business continuity plan with clear instructions of what should happen, and how clients should be served, if something unforeseen happens to them. It should also address everyone’s interests – clients, staff, suppliers, community, dealer firm, and even the advisor’s family. Advisors should also share their general strategy with their clients, whom he said will appreciate the fact there’s a plan in place.
“This is a journey. It’s not an event,” he said. “So, if you’re not having this kind of conversation with key clients, you’re avoiding the elephant in the room.”
Novachis said advisors need to develop a comprehensive succession and exit plan, which includes timing, people and tax implications, client service, shareholder, and estate issues. Getting everything in place for a smooth transition could take seven to ten years, but have a flexible endpoint.
“That allows advisors to set up their business to maximize its enterprise value. They can maximize it by having great people and great processes, enabling technology, and doing great financial planning, support, and consistency,” he said. “They can always extend that seven to ten-year timeline, but might have to accelerate it, too, for health, financial markets, changing tax environment, or the fact there might be a successor opportunity that’s available sooner.”
Finally, Novachis said advisors should discuss both the contingency and exit plans with their dealers to see if it can help by introducing someone who might want to buy a business or a next-generation successor. The firm, like IPC, may also a formalized succession and exit program to aid the advisors.
Novachis noted advisors could work with their own professional advisors – lawyers and accountants – and dealers or with the new certified exit planners who help small and medium-sized business owners with their exit pans to ensure the advisors are ready to maximize their business.
Waiting and hoping for a windfall when the time comes isn’t a plan, particularly given the stiff retirement competition that’s coming and fact the government could increase the capital gains inclusion rate, which would decrease the net after-tax value of an advisors’ book of business.
“These are businesses that have done so many great things for clients, we have to make sure they endure beyond our exit,” said Novachis. “There’s lots of intergenerational wealth transfer occurring, and you want to have great continuity of service and support and a successor who’s going to have the same values and approach.
“So, my biggest piece of advice for advisors is talk to somebody about it and get something documented. It doesn’t have to be etched in stone. You can continually go back and refine it. But, if you don’t have a plan, you’re failing to plan.”
