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“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.

Advisor Says: I lead a mid-sized dealership and have become increasingly aware of the risk to our business of retiring financial advisors. They represent the bulk of assets under management (AUM), revenue and number of clients at our firm. I have been trying to encourage internal succession. However, I am finding that getting these advisors to even begin a conversation about their transition, let alone create an actual plan, is difficult. Any advice on how to begin the dialogue?

Coach Says: I feel your pain, having spent the past decade trying to convince clients I’ve coached and the advisor population in general about the inevitability of their exit from the business and the need to plan for that.

Happily, I’ve seen advisors gradually awaken to the reality of making the transition from their practices as those advisors age, but the job is far from done. When I speak on the topic at conferences, I’ve been both encouraged and disappointed by the conversations I’ve overheard and I’ve had with advisors on the subject of succession planning. That is, I’m encouraged by the heightened interest in this area, yet discouraged by the stubborn inaction by so many in preparing for that day.

I am deeply puzzled by how advisors can insist that their clients have well-designed and documented retirement plans, yet those advisors fail to provide themselves with the same opportunity for success. My conclusion is that while we have been vocal about the issue, we still haven’t elevated it to the level of importance that leads to action.

We cannot save everyone. There are advisors who simply will not be motivated to act and will be left to their own unknown outcomes. Therefore, my best contribution (and, perhaps, yours) is to have greater impact on those who want to be in control of their transition rather than trying to change the minds of hard and fast non-believers. If you and I can point to a few successes, we may get traction elsewhere.

Your comments reflect disappointment rather than despair, so before you become too disillusioned with your mission, let me share how I identify the most likely candidates for success in succession.

By my observation, there are three aspects of a succession plan:

  • mechanical
  • financial
  • emotional

I won’t spend time here on the mechanical part – that is, the documentation and agreements. That is for the lawyers.

The financial dimension, however, warrants close attention because it is at the root of many advisors’ objections regarding designing and implementing their succession plans. I believe that’s because many advisors can’t afford to retire to a lifestyle that parallels the one they have while working.

Of course, they don’t frame it that way. Instead, we get the “terrible TOOs”:

  • I’m too busy
  • I’m too important
  • I’m too young
  • I’m having too much fun

Some advisors can legitimately claim these defences. However, too many advisors use these excuses to hide the fact that while their business provides an enviable lifestyle, their income typically will cease the day they sell their business.

Many advisors proudly tell me that they have a buyer for their book of business who is willing to pay three or four times earnings – to which I respond: “That’s great, but how will you finance your retirement lifestyle in Year 5 and beyond?” Unless the retired advisors have accumulated wealth outside their business, and most have not, they will face a significantly scaled-down retirement existence.

This is also the practical reason why so many advisors who say they just want to “slow down” in their business take the “partial withdrawal” approach of selling a portion of their business and keeping 30 to 50 of their top clients. That allows such an advisor to keep their hand in the game, prolongs the inevitability of retirement and provides some (probably declining) financial comfort.

Yet those top clients probably represent 100 % of the profitability of the practice. Any astute buyer for the remainder of the book is not going to pay top dollar if the profitability has been stripped out.

My initial advice to you is that you may better understand an advisor’s reluctance to discuss exiting their business if you can first determine the financial viability of them doing so.

This brings us to the third aspect: emotional readiness. This is often the biggest deterrent to transition planning. Many advisors simply cannot imagine themselves doing anything else. They have no idea how they would spend their time if they didn’t have to go to the office, interact with staff, do research and, of course, meet with clients. The discussion begins with almost an existential question for many: “If I am no longer an advisor, who am I and what is my purpose in life?”

To help clarify these advisors’ thoughts, I ask questions, including:

How much of your energy comes from your role as an advisor? If being an advisor is the only thing that excites and motivates you, you are not ready to exit.

Will you be OK with someone else doing your job? Imagine you are walking down the street six months after you retire and you bump into one of your former clients who says something like “You know that guy who bought your business? Well, he wants me to do X. Do you think I should?”

What will you say? If you can’t respond with something like “The reason I chose Joe was because we think alike when it comes to X and I trust him to give you the best advice possible,” you are not ready to exit.

Will you miss the “action”? The role of an advisor can be vigorous – managing business operations, responding to client needs, dealing with market volatility, updating financial and investment plans, managing staff, meeting compliance requirements, and so on. What if you are no longer called upon to make decisions, give advice and provide leadership? How will you deal with the emotional withdrawal from being so important?

Will you miss the people? Staff depend on you and clients become friends. Product representatives bring new ideas, and industry and company events provide an opportunity to reconnect with old friends. Once you are no longer active in your business, where will you find satisfaction in personal relationships?

Will you miss the public profile? Given that you are a successful entrepreneur, you are likely to have built a public profile that people not only recognize, but value. Clients are proud to say, “Sally is my advisor.” Your community looks to you for charitable support, leadership on committees and as a general goodwill ambassador. Once you cease to be the face of your business, will the inevitable diminishing of your involvement and profile be an emotional issue?

The psychological challenge of exiting often is a bigger hurdle than financial ability. Still, advisors who are more financially capable of retiring are likely to be more willing to do so. That leads us to a strategy: let’s help hesitant advisors improve the profitability of their business and they will be more receptive to planning their transition.

My guess is that you already have ways and means to do that within your organization. At the very least, that means you can engage your advisors in a familiar subject that is not so intimidating.

In my next column, I will introduce a strategy for making the final five years of an advisor’s career their best by maximizing the value of their business just prior to their exit, enhancing their legacy and making the transition to retirement positively and proudly.

George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to George’s practice-management videos can be viewed on