Why shock-and-awe over low succession planning rates is unhelpful and distasteful

Brooke’s Note: In today’s world, the marketing approach du jour is content marketing and a favorite subject matter for content in the RIA world is infirmity and death. The obsession over the average age of an RIA principal being 57 and the average age of an advisor being 52 is the subject of countless webinars, seminars, articles, studies, surveys, platforms and programs. The conversation is framed as succession planning. While many of the efforts at rationalizing this subject contain good ideas and nuggets of profound truth, it is also possible that, like a good lie, those truth elements are disguising a bigger untruth and that all the hype surrounding succession planning is about as useful as Y2K. You can understand why nobody has tried to cry bullpuckey publicly on this matter thus far. It’s like stepping in front of an ideological freight train — the ideology that says we can plan, i.e. control anything, including our own demise — and damn well better. There might even be some good proof of Todd Clarke’s antithetical take on succession hype right around us. Look at Ned Johnson, Chuck Schwab and Bill Gross. Sure they have help in their companies. But their best plan (notwithstanding Bill’s hiccups) has been to stick around and dare anyone to try to succeed them.

I don’t know about you, but the incessant harping about the hapless succession planning by financial advisors in our industry is wearing on my nerves like a car alarm set off by nothing, whose owner is nowhere nearby.

Even a casual search on “succession planning” in the trade press reveals hundreds of articles on the matter — crowing that only 17% or 22% or 28% of financial advisors have a succession plan.

I would wager that the majority of these offers of advice and input are lavished on advisors by those in the business who stand to benefit greatly — either by fat fee from writing a plan or a fatter outcome should an aging advisor sell them, or allow them to broker, their book of business, aka their life’s work.

In full disclosure, my firm, CLS Investments, recently published a similar succession statistic. But it was another finding based on that same CLS survey that evolved my thinking on this topic of financial advisors easing toward the age of 65. The finding: The average age that advisors intend to retire is 71. That’s just an average.

The finding clearly indicates to me why advisors are proving stubbornly unwilling to be shocked and awed by non-advisors telling them that a sort of arbitrary deadline is hanging over their head because they haven’t put down on paper how they will put themselves out to pasture. And I’d be surprised if many advisors aren’t also taken aback, or a little offended, by the implicit presumption that they are irrational, stupid, unprofessionalor even immoral simply because they are going about their business as if they will never die.

Algorithm of succession

There are advisors that should plan for a sale relating to their state of mind and health. Others were just never cut out for the entrepreneurial demands in the first place. What is the right amount of advisors that should feel urgency about creating a plan? A good clue may be to look at how many firms have plans — 20% to 30%. Maybe it should be on the upper end of that range or, building human procrastination into our algorithm, maybe more like 35%.

But surely the idea that any advisor principal over the age of 50 should stop the presses to get a plan in the safe deposit box is an overrreach. The logic of such a necessity begins to break down when the very nature of advisors and their unique relationship to their vocation gets examined. It is not a tautology built on assets under management, revenue and the falsely portrayed American ideal of checking in to the Florida gated community on your 66th birthday.

The nature of the best financial advisors is that their destiny and life trajectory overlaps with lawyers, doctors and other professionals who come to what they do as a calling. These are typically pros of character and discipline, eager to study long after their college days are over, and rewarded primarily by bringing satisfaction to clients and patients with money as the welcome effluent of a capitalist society.

Exhibit A: If you asked my father years ago, a lifelong financial advisor, when he planned on retiring, his answer was always the same: “I am retired”. And yet he still came in to the office every day with a head of steam. While on the surface his characterization of his employment status may seem demented, he didn’t see it that way. The reality is, working wasn’t work for him. And it never had been. He loved practicing his profession, plain and simple. See: A terrible loss in the RIA business of the original breakaway broker.

Die with your boots on

My father is not an outlier when you consider, for instance, how many doctors and lawyers practice well into their 70’s and 80’s. Their work is their life, and vice versa.

These are not construction workers or coal miners whose bodies have broken down by age 65. These are not loan officers or actuaries who can’t take another day performing functionary duties inside the gray-cubicled world of a bank or insurance company. Advisors don’t want what they do to end.. Helping someone through their financial life’s evolution is as important as caring for them medically and legally. And while your clients may take comfort in the fact that you have a succession plan, equating that plan to a sale may cause an equal amount of trepidation — in other words, as Brooke Southall puts it: “I just might take greater comfort in knowing my advisor plans on dying with his boots on.”

So, what’s with all this white noise about “succession planning”, with a not so subtle subtext of “sell me your practice” or “let me sell your practice for a fee” or “help assure that an orderly transition keeps your assets at my custodian.” I find it distasteful.

The fact is that advisors who are being advised to sell their businesses in order to “retire” are being misled anyway. For one, their firm is likely not worth nearly as much as they think it is, certainly not enough to fund a prolonged period of retirement.

Secondly, isn’t it conceivable that the advisor could streamline the business, re-invent aspects of it and otherwise make their lives easier in such a way as to make the sale of the business irrelevant as a strategic option? Selling may be the end game for some, but one might argue that if that’s the case then they never truly had their “head in the game” in the first place.

The professionals

In speaking with three advisors, one gets a sense of the determination embedded in the spirit of the warrior. Joe Moyer has reinvented his business, Moyer Financial Group, several times as he has progressed in his career as a financial advisor. While his model served clients well, Moyer was convinced that there was a better way to provide financial services that were more transparent and would highlight the value of the advice he was providing. Now in his fourth decade with the Moyer Financial Group, he is seeking to reinvent his practice for a second time. At 66, Moyer is thinking about the future of his business, particularly now that he has a young son at home.

“I really enjoy the business and working with clients, so I don’t plan on retiring anytime soon,” Moyer says. “I figure I have about a 10-year window to reinvent how everything is done.”

Moyer’s plan is to focus on increasing assets under management, while looking for ways to continue to grow his business. He is working on a continuity plan in case something happens to him or the firm. But he feels no pull, no pressure to sell. See: Have an aversion to succession plans? Consider a continuity pact as a vital baby step.

As a result, Moyer and his wife (who is also his business partner) are focusing on simplifying their back-office by streamlining processes so that they are able to create operational efficiencies, enabling them to spend more time away from the business, traveling, and enjoying their young son.

Now consider the tale of Rick Arellano. At 81, Arellano has forgotten more about the business than most will ever know. Currently, Arellano is affiliated with Larkspur Financial Advisors (LFA).

“I don’t want to retire,” says Arellano. “I still enjoy what I’m doing and I guess I’m afraid of the inactivity that comes with retiring. I’ve always been active my entire life and enjoy the freedom that being a financial advisor provides.”

Live to 100

For Arellano, retiring and hanging up his shingle brings uncertainty. “What if I live to be 100 or more?” he asks rhetorically. “I really like my lifestyle and don’t particularly want to change it. As long as my mind is still strong, I want to continue working with my clients. Being a financial advisor is a great profession.”

Learning From Your Mistakes, In Aggregate

And then there’s Dave Huber, who founded Huber Financial advisors in 1988. He was a solo shop in the beginning; however, he quickly realized that if he was to create any business value that he could monetize down the road, he would need to invest in his practice. Looking to build the critical infrastructure necessary to create a sustainable business, he decided to hire his first employee.

“I was able to get the firm to about $60 million on my own, but in order to really make a difference, I made my first key hire in 2000 of an up and coming advisor, Rob Morrison,” says Huber. “It was a scary decision, but one that definitely paid off as now Rob has grown into becoming the President of the firm and runs the day to day operation. Our assets are just shy of $800 million.”

Huber, 57, has also brought his son, 28, into the firm. Along with Morrison, 42, Huber has a compelling story to tell his clients about the long-term vision they have. “It is definitely a competitive advantage to be able to show to new clients that you have stability and a strategic plan to continue the firm, particularly as many advisors don’t,” Huber notes.

Admitted mistake

Huber’s determined focus on an internal succession plan over an external sale was validated by his own admitted mistake of selling his firm to a financial buyer, aka “roll-up” in 2007. This firm ended up having financial difficulties and Huber was forced to step back in and get his stock back. “Selling to an aggregator or other large organization is a very difficult thing to do, given the many different styles, cultures and approaches independent firms have,” Huber explains. “Don’t get deceived by the perceived upside of these deals or the economies of scale promised, you really need to do your due diligence and if anything is amiss, walk away.”

As Huber is moving into the next stage of his career, he notes that having a team in place has done wonders for his lifestyle. “I don’t plan on retiring anytime soon, yet because we have such a smooth transition, I’m able to travel and take extended trips without having to talk to the office at all.”

Huber’s advice to other advisors in his age-band is that, “if you want to pull the blood, sweat and tears out of your business and get paid for that, you really need to build out and invest in your firm so that you have an entity that is worth something. In the final analysis, you’ll want to do what’s best for your clients, your employees, and your family. That’s what ultimately matters.”

Survey says

We recently did a survey of our top advisors. All of these advisors are associated with an independent b/d or an RIA. All of them have at least 75% of their revenue in fees. I wanted to dig deeper to determine why advisors — especially those near or in retirement age — weren’t creating written succession plans.

What we found really surprised us: advisors can’t and/or don’t want to sell.

1. Cobbler Syndrome. We all have heard about the cobbler that made shoes for everyone in the village yet his children went to school barefoot, right?

Financial Advisors seem to be suffering from Cobbler Syndrome. They are helping thousands of individuals prepare for retirement, yet they themselves are not prepared. Only 11% have achieved their desired funding levels for retirement. And 48% said they were less than half way there. They are flat out not ready to retire. Is it any surprise that over half of the respondents did not plan on retiring until age 71, if at all?

2. Valuations. The majority of advisory practices will not provide the payday many advisors are anticipating. And financing of the transaction is often bankrolled by the owner.

3. Desire. We heard comments like “I really enjoy the business and working with my clients” or “I don’t want to retire. I still enjoy what I’m doing and I guess I’m afraid of the inactivity that comes with retiring.”

How many lawyers does it take. . .

Independent advisors should perhaps consider a much more established industry — law — as a model. Lawyers never seem to retire. They literally work as long as their mind and body will allow them to work. The type of work that they do in their sunset years is very different than the type of work they do early in their careers. They typically work less, work with a select clientele, and rely on younger, more energetic attorneys to fuel growth in the firm.

I think advisors can learn a lot by setting up their succession and continuity plans similar to that of the legal field. Advisors need to reinvent the way they are currently running their business so they can enjoy it in their sunset years. The reinventing process may look very similar to a senior attorney. It may involve a more select group of clients and/or a junior advisor to fuel growth.

And so the urge to succumb to the sweet nectar of a potential sale and the tantalizing whispers in your ear of “sell, sell. . .” might best be ignored. Lawyers and doctors live well and don’t build practices to sell them, they build practices to create a symbiosis of serving their clients well, in perpetuity, and receiving the richest rewards of pursuing a calling that involves helping people.

Establishing a succession plan, a continuity plan, is prudent but should be done for the right reasons, one’s clients and family. Selling your business may be a perfectly viable option, if all of the right conditions are met — but should perhaps be a product of a succession plan and not its purpose.

Todd Clarke is CEO of CLS Investments, an Omaha-based, family-owned and operated registered investment advisor managing in excess of $6 billion. As one of the largest third party money managers and ETF strategists in the U.S., CLS partners as an outsourcer with thousands of advisors, plan sponsors, and institutions to offer a wide variety of managed portfolios for more than 35,000 individual investors. CLS uses its own risk budgeting methodology and active asset allocation approach.