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Forced retirement for financial advisors is a bad idea

28 October 2021 Guy Holwill, CEO at Fairbairn Consult
Guy Holwill, CEO at Fairbairn Consult

Guy Holwill, CEO at Fairbairn Consult

Succession planning must start well before someone turns 60

Planning for retirement is perhaps the most important theme for financial advisors as they work with their clients. Ironically, retirement is a big problem for advisors themselves, not least when they decide to, or worse – are forced – to embrace their sunset years.

Despite most advisors not wanting to just exit, many face forced retirement in tied agencies, banks, and some corporate brokerages. This is a problem as it directly affects their clients, who are typically of a similar age, because young advisors will start working with people in a similar age bracket, and clients then become friends over the next 20, 30, or 35 years.

However, the problem extends beyond friendships and the joy of engaging with people they have seen navigate important milestones. If an advisor is forced into retirement at 60 or 65 years old, they are being ripped away from their clients, most of whom are about to retire and need to make arguably the biggest financial decisions of their lives.

It is an incredibly unfriendly and unfair client practice. Why? Because forcing an advisor into retirement robs his or her clients of the counsel they need during a milestone they have spent years planning towards with the advisor. It’s exactly for this reason that we don’t impose forced retirement on advisors at Fairbairn Consult.

Very few advisors plan to exit suddenly. However, there does come a time when they may need to slow down or rearrange how they work. Failing to plan for this change will make the process complicated, difficult, and messy. While the Financial Advisory and Intermediary Services (FAIS) Act states that continuity plans must be in place, there is a misconception that succession planning is a long, painful process.

When it comes to succession planning, you need to distinguish between continuity planning and retirement planning

Continuity plan

All advisors need a continuity, or “drop dead” plan, even if you are only 25 or 30 years old. It is important to think about what would happen if you were to die or be incapacitated prematurely. The process needs to be clearly agreed upon and documented to prevent complications.

Key considerations include who would take over the practice and whether they have capacity to add your client base to theirs? It’s important that your chosen successor has a similar advice philosophy or clients will have a hard time transitioning. Do they have the correct accreditations and contracts with suppliers?

Will this person buy your practice, and if so, have you defined who the proceeds will be paid to, and considered the tax implications? It’s advisable to agree on how the practice will be valued so that in the scenario that you are no longer here, the process will be fair for your beneficiaries.

It’s important that you communicate with your staff and clients. Staff need to know whether they would still have a job and clients must understand how it would affect their relationship with the practice.

Retirement plan

Also called planned succession, this is where you start thinking about the future and what will happen to your practice when you retire. The first thing to consider is what retirement means to you. For some is it walking away and going fishing and for others, it means a gradual process of working fewer and fewer hours a week. The next thing is to identify a successor, and whether they are already working with you? In many instances, successors spend many years working in the practice.

Key considerations with this type of plan include the legacy you want to leave, when you intend retiring and whether you will revert to a client relationship role? If your plan is to remain in the business in some capacity, have you agreed on how you will be paid? And finally, the most important consideration is how many years you have set aside for the transition of client relationships to your successor? Best practice is about four years, but there are instances where a second-in-charge, or 2IC, works with the advisor for a decade or more.

How to get started

As with most things in life, something is better than nothing. So start today – set aside a few hours and write down what you would like to see in your succession plan. As you flesh out the finer details it will take more time, but this is a valuable investment. The next step would be to communicate the plan with staff and clients.

A good piece of advice is to start getting your practice valued every five years from about the age of 40. After each valuation, analyse what needs to be done to increase the value of the business and then spend the next five years making those changes. This way you will steadily increase the value of the business.

Finally, every entrepreneur has an exit strategy – they know what they want and need to do to make their exit strategy play out as expected. In many cases, financial advisors don’t think this way. A lasting piece of advice is to act like an advisor but think like an entrepreneur.

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