How to make a graceful (and profitable) exit

Alex Cook, CEO, GCI Wealth.

Wealth managers and financial planners are successful because they focus on ensuring a secure retirement for their clients. However, like many other professionals, they often neglect to plan for their own futures. GCI Wealth has created a solution for them.

When it comes to managing wealth, one of the most critical success factors is to ensure the transition from earning an income to living on one’s investments. This is particularly true for professionals, whose businesses are largely built on their own skills—when the principal is no longer active, then what was a prosperous going concern suddenly looks highly insecure.

In other words, the professional is the business, so there is no intrinsic value to be sold.

Wealth managers and financial advisors certainly fall into this category, and “capitalising” their hard work into a reliable income stream for retirement is a delicate business that needs to be carefully planned. Like the proverbial cobbler with his barefoot children, the typical wealth manager often does not have a succession plan that will provide continuity for clients as well as ongoing income for the retiree.

There’s a further incentive for wealth managers to make sure they have a credible and effective succession plan in place: it’s mandated by the Financial Advisory and Intermediate Services Act, and they could face a fine by not having one in place.

Dedicated succession planning for wealth managers and financial planners

This challenge is particularly acute for independent wealth managers and financial planners. Overcoming it is so tricky that GCI has created a separate division to help wealth managers provide continuity for their clients and create a post-retirement income stream for themselves. We see it as a logical extension to our own profession of our overriding mission to help our clients retire safely.

Ensuring continuity for clients is fairly easily solved by becoming part of the GCI stable. As part of the process, our team will help the wealth manager or financial planner find the right colleagues to work with and ultimately take over clients.

This ability to phase in a new wealth manager is the key to the second element, namely ensuring an ongoing income stream for the original wealth manager. This is because it maximises the chances that the existing client base will stay loyal—in other words, the client base remains an asset. We then use that asset to create income by negotiating a split-revenue arrangement that continues for the original wealth manager’s life and even for a period after his or her death.

It’s worth emphasising here that this approach will yield a much larger income than would be generated by accepting a lump sum for an outright sale of the practice to a third party. The rule of thumb for such transactions is that the sale price is about twice the practice’s annual income, even though this is less likely these days given the fact that there’s no guarantee that the clients stay on. A reliable income stream is preferable on every count.

Another benefit of joining GCI is that while the wealth manager is still working, we are able to reduce his or her fixed overheads through economies of scale, thus increasing net income. This extra income—and it can be fairly substantial—should be used for extra retirement saving.

And, of course, having the administration and compliance work taken care of does free the wealth manager up to do what he or she does best: see clients and exercise their creativity to come up with the best possible solutions for them.

Taking a longer-term view

This approach is also highly applicable to younger wealth managers. By joining a boutique specialist operation like GCI they can use the same principle to build a much bigger client base early on. As they become better established and reach the limit of the number of clients they are able to service personally, they would be in a position to transfer the lower-value ones to a colleague in order to take on higher-value ones. Again, revenue-split agreement would be negotiated to make the arrangement worthwhile for both parties.

Equally important, my earlier point about the impact of reduced overheads on net income would hold true: money that, if used wisely, could be used to build up capital for retirement.

We believe that wealth managers deserve the same creative service that they give their own clients, and we’re confident we have developed a solution that offers real solutions to a real problem.