It's no surprise that wealth managers are talking about the "Great Wealth Transfer" transpiring over the next two decades. A staggering $84 trillion should pass from baby boomers to other generations; that is a lot of wealth to discuss. However, another transfer isn't getting the same attention, and I have seen the silence drive a debilitating wedge between generations of firm leadership, or worse, tear families apart.
We have all seen the stats that spell trouble ahead:
• More than one-third of financial advisors expect to retire in the next decade.
• Nearly three-quarters of advisors quit after three years in the industry.
Theoretically, that should bode well for successful mid-career advisors looking to step into ownership at their growing firm. Due to the evolving nature of the industry and the potentially inflated valuation offered for firms, that is not happening.
When Silence Isn't Golden
Conventional wisdom states that wealth passes from one generation to the immediate next generation. The same could be expected of near-retirement financial advisors at firms with NextGen team members. Of course, many of these entrepreneurs want the highest payout for their life's work, which is often out of reach for the firm's next generation.
The lack of cash, escalating interest rates and ever-increasing valuation of advisory firms have quashed the next generation's ability to finance a buyout. With the second generation on the sidelines, owner-advisors start to eye PE-backed aggregators—often seen as responsible for the sky-high valuations—as the only viable option for taking "chips off the table."
The trouble in this kind of economic environment is that NextGen advisors increasingly cannot offer a viable solution and are left out of the succession conversation. I have witnessed a father-son relationship fracture because the elder executed a lucrative succession plan that left his son with permanently lowered payouts and little incentive to continue growing the business.
Tearing Down Fences By Building Bridges
Thankfully, the financial services industry is starting to understand the long-term risk in this approach. We need growth-minded advisors to build the next iteration of the independent wealth management industry. While we could increase our profits by simply bringing these accounts on board and servicing them with junior team members, that is not what clients expect, and it does not facilitate sustainable organic growth.
Some firms have the foresight to provide better choices for advisors who may have felt slighted. Beyond the traditional sale, there are more flexible ownership affiliations and structures. While not ubiquitous, these solutions can give the owner-advisor a payout while also giving the next generation opportunities to create wealth and generate meaningful income—along with a long-term incentive to grow the business under new ownership.
We will continue to see a model evolve away from one where retiring advisors reap all the rewards and leave fewer financial incentives for the next generation. Many firms like NewEdge Advisors provide retiring advisors with an initial payout and NextGen advisors with a growth plan and competitive future payouts. This structure might involve a firm affiliating under a 1099 model and shifting to a W2 structure.
It is a model that can remove the wedge between the generations by giving everyone more of what they need to be part of the conversation.
Talk About The Future Today
As our advisors do every day with their clients—we need to talk about the uncomfortable realities of tomorrow now. Working with forward-looking consolidators may provide the right balance for a highly valued advisory firm, delivering a meaningful capital infusion for retiring owner-advisors and the incentives for NextGen to continue serving clients and growing the business.
Neil Turner is co-founder and co-CEO of NewEdge Advisors, a fast-growing independent hybrid RIA.