“I don’t have a successor. Now what?”

6 ways to ride off into the sunset for advisors without a next gen in the wings

The wealth management community agrees on one thing: We have a massive next gen talent gap, and it’s worsening with each passing year. Wirehouse advisors with no obvious or natural successor in place are especially vulnerable to the unique challenges presented by the so-called succession gap. It’s a conundrum that directly impacts the ability to monetize their life’s work when the appropriate time comes.

Such advisors face a unique dilemma as their career winds down, which boils down to this: Who will “take them out?”

By “take out,” we mean two distinct but related functions: 1.) Providing a monetization event for the senior (retiring advisor); and 2.) Providing a succession plan whereby the clients can continue to be serviced with little to no interruption or friction.

Then how do advisors without such an obvious heir apparent reconcile this critical issue? Here are 6 possible ways and the pros and cons of each:

1.)      An arranged marriage: Since wirehouse sunset programs (AKA retire-in-place programs) require a next gen “inheritor,” the easiest solution for advisors in this position is to simply let firm management find a successor for them. There is likely no shortage of next gen advisors who are hungry to take over a quality book.

• Pros: This allows an advisor to walk the “path of least resistance” in the same way as an advisor who has a built-in succession plan. It’s relatively risk-free and doesn’t require any transition risk.
• Cons: Advisors in smaller markets may have difficulty finding a quality successor, even with the firm’s help. And larger advisors may not have palatable next gen advisors available with the sophistication needed to service their books. Lastly, this move ties the retiring advisor’s legacy very onerously to their current firm.

2.)      Actively seek out a next gen: One issue advisors have with letting the firms find them a successor is that the firms are notoriously bad at doing so and not particularly proactive about it either. So, some advisors feel it’s incumbent on them to find an in-house successor themselves.

• Pros: If they successfully find a quality successor, the advisor can enter into a sunset deal with their hand-picked successor as the recipient.
• Cons: This is really hard to do well! If it were easy, advisors likely wouldn’t be facing this challenge to begin with. Also, it usually means fishing in a limited pond (i.e., their current branch or complex, or maybe region).

3.)      Do nothing: Some advisors feel that the currently crafted retire-in-place programs are just too onerous for both the retiring and inheriting advisors. These advisors might run the business until they can’t or no longer want to and then walk away.

• Pros: It’s liberating and certainly a way for an advisor to go out entirely on their own terms. Also, it requires the least amount of planning or work in advance.
• Cons: Obviously, the major downside of such a “decision” is that it doesn’t allow the advisor to monetize in any way, shape, or form. They are basically walking away from their life’s work. Also, it doesn’t provide any sort of succession plan for your clients, who would presumably be forced to pivot to a new advisor or firm.

4.)      Find an external successor: If there is no logical successor in-house, an advisor might look outside at other firms to see if they can compel or recruit another advisor to join their current firm. Often, the promise of inheriting/taking over a meaningful book is enough to make a prospective next gen consider joining the firm.

• Pros: Presumably, this gives an advisor a much larger pond to fish in, and they can find someone with similar values and client service model. The next gen advisor joining the firm gets a nice recruiting deal and becomes the successor to a book of business. And the retiring advisor can now enter into the firm’s sunset program.
• Cons: This is easier said than done! Ask any firm that has tried to recruit: It’s hard enough to identify a possible successor and harder still to convince them to move to their firm. As such, it likely takes longer than some other options on this list. 

5.)      Change to a new W-2 firm: This decision is easy enough to understand: if the advisor doesn’t have a quality successor at their current firm, perhaps moving to another firm will enable them to find one. It’s essentially a new pond to fish in, and the onus of finding a successor is placed on the recruiting firm. An advisor who is being courted has real power. They can tell a potential new firm, “If you want to win my business, you must find me a quality successor before I walk in the door.”

• Pros: This move allows advisors to “move once, monetize twice” since they will get a transition deal from the new firm and then can enter into that firm’s retire-in-place program. Also, if an advisor has frustrations with their current firm, this move can have other positive side-effects—like improving client experience, technology, investment platform, etc.
• Cons: This is a transition—and that comes with risk, friction, and potential portability issues. Also, it likely extends the sunset timeline by a bit. An advisor who wants to transition to a new firm and then retire in place is probably facing a 3–5-year window at a minimum before they can seriously consider stepping away.

6.)      Make the leap to independence and then sell the business on the open market: This move entails the greatest amount of effort but also offers potentially the most lucrative upside. After an advisor makes the leap to independence, they can sell their book at a significant multiple and for long-term capital gains treatment, to boot. The buying firm becomes the successor.

• Pros: Besides the valuation premium and tax treatment benefits, this move allows for the most customization and flexibility with the “when and how” of the glide path to retirement. Wirehouse sunset deals are pretty rigid in what they allow in terms of timing, so these transactions present an attractive alternative for advisors who aren’t yet ready to choose their retirement date.
• Cons: First and foremost, this is likely a two-step process. First, the advisor needs to transition to an independent model like an RIA, and then they can sell. As such, it requires more time, effort, and risk. Also, finding a buyer who is aligned culturally, philosophically, and otherwise can be challenging.

 As these examples illustrate, there are no perfect avenues for an advisor without a successor to sunset out of the business. That’s why it’s imperative to consider a solution early and often—even 10 or 20 years before contemplating retirement.

The good news is that even sole practitioners without a next gen have quality options—whether it’s within their current firm or not. It just means thinking creatively to ensure you are solving for the dual mandate of properly stewarding your clients to the next generation while monetizing your life’s work.

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