The danger signs are numerous.
Where Have All The Clients Gone?
Consider the advisor with a lot of elderly clients, a fair number of whom are now dying. Some of them have substantial assets, but their heirs don’t want to continue with the same advisory services. They are members of a new generation with little connection to their parents’ financial counselors.
The advisors might start to get very few new clients and almost no young ones. The most important assets of their practices, assembled through years of carefully built relationships, start to disappear. The advisor may see little or no equity at the end of his or her career as a business owner.
For Kreft, the problem is that the average advisor is a sole practitioner with almost no organization, and possibly just a staff of one or two people. He or she doesn’t want to face the problem, keeps saying something will be done, but puts off serious consideration, possibly until it’s too late.
Who Will Be The Next Leader?
“They don’t have a second-generation plan in place or even a contingency person,” Kreft says. “Aging clients in their 80s or 90s start to ask what happens to them if the advisor dies.” The advisor often doesn’t want to retire because he wants or needs the yearly income; he either never sells the equity in the firm or tries to do it when it’s too late to pull equity out. He fails the Branch Rickey test for obtaining maximum value.
“At a certain point, you are either going to grow a business or it is going to die,” says CFP Emily M. Chiang. Or you do what she did: She sold her advisory business some three years ago. Chiang, with 35 years’ experience in the financial services industry, is the author of the book Selling Your Financial Advisory Practice: A Step-By-Step Workbook.
Although selling is the logical move, some advisors, like aging sports stars who can’t acknowledge they’re no longer great, may not realize that the prime years are past, says an industry observer who analyzes the business.
Should an advisor build a new house as the old one begins to crumble? Start building up a new client list even as the old one starts to disappear? That usually means bringing in young professionals who can communicate with clients difficult for the veterans to reach.
Yet Kreft says it’s difficult for veterans to bring in new professionals and make it work out. Either the wrong person is hired—someone who isn’t trained properly—or the younger advisor becomes impatient waiting to take over, perhaps becoming resentful while doing the lion’s share of the work. A middle option for veterans, Kreft notes, is to sell the firm to the younger person and become that person’s employee or an independent contractor over time.
“This provides continuity. The expertise the owner has built remains with the firm after he has sold,” Kreft says.
Time To Sell?
Advisors might want to sell, says Chiang, if they don’t care as much anymore about the business they spent decades nurturing. Chiang says she decided to sell hers when she realized she was becoming bored by client stories.