As the wave of baby boomer advisors move closer and closer to retiring, so too is the pressure building for a wave of selling of financial planning practices. Yet the reality is that the retirement wave may not be nearly as large as anticipated - in part because difficult markets have left many advisors behind on their retirement savings (not unlike so many other baby boomers!), but more significantly because many advisors enjoy doing financial planning and feel capable of continuing to do it even in their later years! The latter is especially true if the practice can be transitioned to a somewhat lighter load with fewer staff and management responsibilities; a so-called "lifestyle" practice.

Unfortunately, though, advisors planning to continue a lifestyle practice and "die with their boots on" face another problem: how to capture the value of the business when a death or disability event really does remove them from the picture. Fortunately, new options are beginning to emerge - from acquiring firms that will take over the ownership and management responsibilities and just let advisors live a lifestyle practice within a larger firm, to firms that are beginning to offer contingent purchase agreements tied to outsourcing platforms that will allow them to buy the business if/when/as needed but not before. Given the new choices emerging, does that mean when we finally reach the point where advisors are supposed to retire, we'll find it's nothing more than a mirage? Is there really a near-term succession planning crisis looming for advisors, or just a distant exit planning problem?

Just as the aging baby boomer demographic is driving a rising wave of retirees - an estimated 10,000+ baby boomers will turn 65 every day through the year 2030 - and shifting the financial services industry to an increasingly retiree-centric focus, so too does the tale of the aging boomer describe another massive trend: the looming retirement wave of financial advisors. The average age of a financial advisor is now approximately 50 years old, and continues to rise every year. To put the math in context: rough speaking, for every new 20-something that graduates from a financial planning college program and comes into the industry, there are two advisors who just became eligible for Social Security benefits.

The implication of this aging demographic is that advisors will soon begin a mass wave of retirement in the coming years, leading to a buyer's market for financial planning practices given the imbalance between older sellers and younger buyers. But is that really an accurate reflection of the coming advisor marketplace? Will advisors really retire when the time comes?

When To Exit From The Financial Planning Practice

For some advisors, retirement will have to be delayed, for the simple reason that as markets have languished for prospective retirees - forcing baby boomers to increasingly delay retirement - so too have those same forces impacted advisors. In other words, between poor market returns, and the impact that "new normal" mediocre markets have had on the growth of financial planning firms themselves, many advisors simply don't have the wealth necessary to declare their financial independence. In some cases, the problem is exacerbated by the fact that if the financial planning business is sold, the proceeds will have to be reinvested into public markets that, at current prices/yields, will provide far less income than just keeping the advisory practice in the first place!

But the broader issue is that many advisors simply don't want to retire, because they enjoy what they do - especially if they can focus the practice to get rid the job duties that are the least desirable! In other words, financial planning is a classic example of a profession where you can "die with your boots on" and don't actually need a succession plan - given that it is not exactly a physically intensive business, as long as the mind is able and the body allows for meetings with clients, planners can continue to work. And it appears that many are doing just that, aided more than ever by the assistance of technology and outsourcing to craft a "lifestyle" practice, or alternatively to "tuck-in" under another financial planning firm to take advantage of their resources. In fact, in some cases the process of transitioning a business to make it more saleable also makes it easier to retain as a lifestyle practice, reducing the likelihood of completing a sale!

Yet the implications of this - that the wave of coming advisor retirements may be a mirage that won't really materialize in the coming years when we get there, and that most planners don't really need succession planning because most of them simply won't need a successor for a long time to come - has profound implications for practice management trends and decisions for financial planning firms.

The Real Exit Time

Of course, the reality is that it's not possible to delay an exit from the business indefinitely - at some point, it becomes impossible to meet with clients at all, whether due to being disabled by a sudden or deteriorating health event, or due to death itself. Unfortunately, though, as many advisors continue to remain active in the business right up until that point, it creates an especially problematic scenario: a sudden loss of a key person to the business, which can completely destroy the value of the business as an asset for a surviving spouse or heirs... not to mention leaving clients abandoned with no continuity or support!

Accordingly, for many planners succession planning for their business is actually about trying to plan for an ultimate and potentially untimely exit from their financial planning practices. It's not really about a sale of the business at retirement, but an exit sale due to death or disability, whenever that may be. Unfortunately, though, the unknown timeline for when death or disability may strike makes the process of pure exit planning difficult.

Many advisors manage this risk by entering into formal or informal buy-sell agreements with other local advisory firms. Unfortunately, though, the reality is that in most cases such firms as buyers cannot effectively execute the deal when the time comes - the practices simply don't have enough staff and support to instantaneously double in size as the firm takes over another advisor's book of clients with no warning! Or for that matter, have the financial wherewithal to pay for the deal and buy the business out from the planner's surviving spouse or heirs (unless it's already funded with life insurance, which appears uncommon)! The conclusion in most cases: the friendly "I'll buy your practice, you buy mine" strategy it's a nice theory for an exit plan, but simply not feasible in practice.

Alternatives For Exit Strategies

So what are the alternatives for business exit strategies, where the advisor doesn't want to quit and sell now (and/or is having trouble finding a successor anyway), but doesn't want to have the business and its value collapse due to an unexpected health event (not to mention having clients poorly served as they are scattered to the four winds)? A few options are beginning to emerge.

The first is to sell the practice earlier rather than later - not as an exit strategy to stop working, but simply as an exit strategy for ownership. In the transaction - where the practice is usually sold to a much larger firm and integrated into their business - the advisor remains on board to keep working with his/her clients, and receives ongoing compensation (typically salary or a sharing agreement based on client revenues) for working with clients, but is bought out of the ownership interest. The end result is that the advisor can keep working with his/her clients for the indefinite future, and receive appropriate compensation for that work, but get paid for the value of the practice and be relieved of the burdens and stress of ownership and an uncertain exit strategy. Some planners have been hesitant to do so, noting that they give up on future growth of the business; however, if the planner wasn't looking to keep growing the business anyway, and clients are older and taking withdrawals, there may not have been much of any upside remaining anyway! In the meantime, the upshot to the strategy is receiving access to the larger firm's resources, technology, and support, and knowing that clients will be taken care of even after you're gone, because the acquiring firm can provide another advisor to ensure continuity for clients. In point of fact, our own firm Pinnacle Advisory Group is beginning to explore deals along these lines with several independent advisors around the country, and I'm hearing from a number of other $1B+ RIA firms also exploring the strategy; this trend of "tucking in" advisors to existing firms appears to be growing increasingly popular and appealing as a strategy for both the buyer and seller, especially as financial planning business growth has stagnated in recent years.

The second option is to establish a viable exit sale agreement that can be triggered at death (or potentially upon health decline/disability), but structured in a manner where the practice and clients could really be transferred if the advisor was suddenly and unexpectedly out of the picture. This means the advisor can't simply run his/her own practice as is until that future date and expect a smooth transition after he/she is (suddenly and unexpectedly) out of the picture as many such deals are structured today; instead, the practice is transitioned operationally onto a platform that could function with both the original advisor and a new advisor, but the actual transition - of both clients and ownership - doesn't occur until later. A version of a program like this was just announced by Focus Financial Partners, and another one for independent advisors was recently launched by Pinnacle Advisor Solutions.

In both scenarios, the key is that practices and clients can't just be transitioned instantaneously, and the process is even more difficult when the advisor has unexpectedly left the picture. But that doesn't mean the only alternative is a multi-year succession plan; in fact, it's becoming increasingly evident that a large number of advisors don't want to leave their practices at all, and that the looming wave of business sales may just be a mirage. Instead, many advisors want to "die with their boots on" and work until they just physically can't, if it's possible, and opportunities are beginning to emerge that allow for it. However, the pressure is on to take some steps in advance, not for succession planning but for unexpected-exit planning, so that the practice and its value doesn't just die with the advisor.

  • Robert Henderson


    These are great points. And I think your first scenario (selling to a larger firm and then remaining on as an employee) is probably the smoothest option.

    The challenge I see is in small markets (like where I happen to live) where there may not be a viable firm in the area to sell to, or in some cases, the practice you have built is not really an ideal candidate for someone else to buy.

    I have been approached by a few retiring advisors about buying their practices, but once you get into the details, they are really not very attractive. Very old client bases, depleting asset base, small average household size, commissioned assets, a hodge-podge of assets and asset types, a mix of asset locations (fund held, firm held, etc.), and lots of “special deals” with clients (this is common with some tax preparer/financial advisor practices).

    I think very few solo practitioners think about the marketability of their practices as they are building them, which is unfortunate.

  • Ross Richardson

    Thanks, Michael. A nice, balanced review of the issue with possible solutions.

    Earlier this year, my firm was “tucked-in” to a much larger, very well-respected firm run by a colleague of mine. On paper and from 20,000 feet, it was a slam dunk for us both, but after less than 90 days I pulled the plug on the transaction.

    The driving, and very powerful, force behind the decision to “no go” was that after many years of operating a solo practice, I found it impossible to blend back into the processes an procedures of a larger, well-managed firm. It sounds a bit crazy, but having much earlier in my career left a larger firm to create my own lifestyle practice, moving back into the large firm realm ended up comprising my principles and priorities more than I could stand.

    It was painful, but thanks to some amazing clients and a very understanding and accommodating ex-partner, we were able to complete the “tuck out” in just two months. In the process, I learned a lot about myself and what was really important to me, and more importantly, after several deep conversations with clients, I learned much more about what was important to them, and how they viewed this succession thing. I learned it was not just about me and the firm. I learned that clients had differing views of what a succession might look like. And, I learned that one size definitely does not fit all when it comes to succession models.

    In the end, all of my clients returned to my old firm, which was pretty much still intact, and we now have the agreement to go back to the drawing board on this issue. In speaking to some other solo advisors, I have heard of other creative alternatives I may consider as part of this.

    Thanks for pushing the discussion, I look forward to more of the same and hearing of the experiences of others.

    • Michael Kitces

      Indeed, because of this dynamic I find the tuck-in path tends to work better for either those advisors who really DON’T want to be running a business (and just didn’t have an alternative before), or those who really truly want to let go of business control to just focus on a client service lifestyle practice.

      For others, who still wish to retain more control over the business and how it’s run, I think the platform exit strategy scenarios are more appealing, as they leave the most control in the hands of the planner as long as he/she wants to keep running the business (which, albeit biased, is why I’m so upbeat on the exit strategy option we’re rolling out on the Pinnacle Advisor Solutions platform).
      – Michael

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  • Monday, March 25th, 2013
    As the financial planning profession matures, there is a growing interest in the opportunities to buy and sell financial planning ... Kitces | Nerd's Eye View
  • Monday, June 3rd, 2013
    The profitability of a financial planning firm is a sensitive issue for many advisors. For some, the income of the business is a primary ... Kitces | Nerd's Eye View
  • Tuesday, January 20th, 2015
    […] firm can acquire 50, 100 or 500 at once? Thus far, the imbalance has been a surprise to many, with the expected wave of retiring ... Top Advisor Issues: Advisor FinTech; Regulation; Differentiation

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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