A major challenge for new financial advisors is gaining the trust of clients who are typically much older than them… as it can be hard to gain the trust of clients who look at you like one of their children (or grandchildren!).
However, the reality is that age bias isn’t unique to newer and younger advisors. A form of “reverse” age bias also exists from younger clients towards “older” and more experienced advisors, where the client may fear that the advisor is going to retire (or even pass away) before the advisor can fulfill their long-term relationship to serve their client!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at some strategies that experienced advisors can pursue to address this client fear. After all, it is legitimate for clients to be concerned about being repeatedly forced to go through the work of finding a new advisor over and over again if their existing “older” advisors keep retiring before they do!
In fact, given this fear, the best way to address age bias against experienced advisors is to have a solution that ensures continuity for clients. This could be establishing a succession plan, such that the business will outlive the founding advisor (which means clients can continue to be served by the business, even if it’s not the original advisor who’s servicing them). Or the approach could be to simply sign an “exit planning” agreement that contractually obligates another (larger) firm to buy the practice and continue to serve the clients, again ensuring from the client’s perspective that they won’t have to search for a new advisor as soon as their current advisor retires.
Alternatively, it may be more appealing to simply shift the nature and focus of the business itself, away from “long-term” relationship-based financial planning (that’s hard to deliver on with a limited time horizon), and instead focus on hourly or project financial planning work, which is more “transactional” in nature and doesn’t have the same high stakes for clients.
In any event, though, the bottom line is that it really is reasonable for clients to raise the concern: “I don’t want to have to start over finding a new financial advisor by working with an experienced one who may retire soon (or that I may outlive altogether).” But that’s not an insurmountable challenge for an experienced advisor. It simply means limiting and narrowing the scope of the financial planning engagement, or ensuring that ultimately the client’s relationship is really with the advisory firm, and that they can continue to be clients of the business long after the original founding advisor has moved on!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
A few weeks ago, I did an Office Hours segment talking about the challenge for younger advisors in overcoming age bias. That challenge you face as a younger advisor, where you’re sitting across from a client and trying to gain their trust, and they’re looking at you like you could be their grandchild. It’s hard to build trust when they’re seeing you in the same category as their grandkids!
So, I’d offered some suggestions. There was great discussion in the comments about how young advisors were overcoming the age bias from clients.
But I also got a lot of feedback from some of you who are experienced advisors, at the other end of your career, who made a really, really good point that age bias isn’t just a young advisor thing.
Of course, outside of financial services, age bias and age discrimination is primarily against “older” folks. Workers over age 40 are a protected class under law. It’s the irony that for financial advisors, age bias is primarily against young advisors. Still, though we also have this “reverse age bias” from some younger clients towards more experienced advisors as well.
For instance, “Don” contacted me and said:
“I’m age 67. I’ve been a financial advisor since I was 23, so I’ve lived through all the age bias when I was young. Now I’m living through age bias against me from prospects that are under 50. Sometimes I feel like anyone under 50 looks at me as though I’m going to drop dead any minute!
Do you have any tips for overcoming age discrimination from clients against older advisors like me?”
Great question Don.
First, I should say that I’m glad to hear you’re at least so young at heart… not only actively working with clients, but still taking on new ones, at the tender age of 67! This is a great reminder that being a financial advisor is one of those professions where you can do it far beyond the “traditional” retirement age. It pays a good income, especially if you’re experienced and have built a client base. It’s mentally stimulating. It’s psychologically rewarding, given all the close relationships we make with our clients. In fact, I’m the guy that’s been pounding the table for years saying that this whole succession planning crisis that the profession is facing was going to turn out to be a mirage because so many advisors that were “supposed” to retire soon aren’t going to. Because it’s too good to stay active as an advisor, both mentally and financially!
The Challenge Of Client Relationships With “Older” Retirement-Aged Advisors [Time – 2:46]
Notwithstanding the fact that you can be a financial advisor well past the “traditional” age of retirement, the challenge still is that this is a relationship business. And so being an older advisor… I’m going to call it a “retirement-aged” advisor since “older” itself is kind of a judgment-laden term and I don’t mean to use it that way! But being an advisor, that is, we’ll say… old enough that you could be retiring, is still a challenge in a relationship business. Because clients are coming to work with us for the long term.
In other words, most of us build long-term financial planning relationships with clients. But it’s hard to be a long-term advisor for your clients, when you’re already at the age of retirement as their advisor, and may retire when they still needed your help!
And I have to admit, I think this is a legitimate concern. Even for someone who’s already entering retirement and looking for an advisor… retirement can last decades. If as an advisor you’re already retirement-aged as well, clients have a legitimate concern about whether they are going to have a need for retirement advice from you for longer than you’re going to be physically and mentally able to still be their advisor! With a risk that they may outright outlive you as their advisor!
And for “younger” clients, who Don was talking about… those under 50, who would be Gen X and Gen Y clients. Now it’s a question of not just whether the advisor is going to outlive their retirement, but whether the advisor is even going to still be in practice when they get to retirement.
This is a legitimate fear for clients because the reality is that it’s a lot of work to find an advisor in the first place. They might be thinking, “I don’t know that I want to invest all this time, and effort, and energy into a financial advisor who’s that experienced, when they may retire soon or have something happen to them, and then I’m going have to start over again in a couple of years.” It’s very stressful for clients to keep starting over with a new advisor every couple of years, if they keep picking experienced advisors who are close to retirement themselves.
Notably, this concern isn’t unique to clients, iether. Regulators now are getting involved with this. For instance, NAASA – the North American Securities Administrators Association – put out a model rule last year requiring state registered investment advisors to have a continuity plan so that their clients aren’t just left like dust in the wind if something unexpected happens to the advisor. And now the SEC is putting a new proposal forth under rule 206(4)-4 that would have a similar continuity planning requirement.
In fact, I know a number of advisors in their 30s and 40s who actually say to clients, “Don’t you want an advisor who’s actually going be around for your entire retirement journey?” In other words, rather than struggle with their younger age as a bias against them, they use their younger age as an advantage to say, “Well, if you work with a older, more experienced advisor, he/she may be older and more experienced, but it also means you’re likely going to have to ditch them and find someone new in a couple of years because they’re going to retire before you do!”
Team-Based Financial Planning And Succession Planning For Client Continuity [Time – 5:32]
So, how do you handle this as an experienced advisor like Don? I think you do have a couple of options.
Number one is that you adopt more of a team-based financial planning approach within your firm, and you start building a succession path for your business and your clients. In other words, you hire a younger paraplanner or an associate financial planner, and you start serving your clients as a team.
From the clients’ perspective, this begins to introduce more continuity for them. Because it’s not just you anymore serving the client, it’s you and this other advisor who’s sitting in second chair. So at least if something happens to you, the client still knows there’s someone else to call who can help them.
And whether you state it explicitly to them or not, the implicit message to the client is that there’s now a succession plan in place. Ideally, it should actually be explicitly stated, but the client at least implicitly understands, “Now, there’s someone who can keep working with me even if the original advisor that I started working with decides to retire, or if something else happens to the advisor.”
Which means that while we talk a lot about succession planning from the perspective of advisors trying to maximize the value of their business – to sell it and get a check for the value they’ve built – succession planning isn’t just about harvesting the value of your business. It’s a key benefit for clients, too. Because it gives them confidence to work with you, recognizing that the firm will be there for the long run… because even if it’s not you personally, some advisor who works in the business will be there to serve them in the long run.
In truth, that’s the whole essence of what it really means to build a business that outlasts you, and not just a practice. It’s not just a business that survives the founding advisor as a business entity. It addresses the fear for clients looking for a long-term relationship… that even if they outlast the advisor, they won’t outlast the advisory firm. Which is especially important if you’re still looking to grow the practice, as Don is, because this is a legitimate fear for prospective new clients!
Exit Planning For Continuity Of Client Service [Time – 7:53]
The next option to address the potential age bias against experienced retirement-aged advisors is that if you won’t create a full succession plan – which means you bring in the young associate and you bring them up through the ranks – at least have an exit plan that maintains client continuity.
As I mentioned earlier, this is already becoming a requirement for state-registered investment advisers with the NAASA model rule last year. And it’s soon going to be an SEC requirement as well. Notably, the regulars aren’t requiring a full succession plan, where you go hire an associate planner and transition your business and clients to them. That’s an option, but not a requirement. What the regulators do want to see, though, is at least some way to ensure a smooth wind-down transition of the business so client’s aren’t disrupted… particularly if it’s an unexpected exit like a sudden health event.
In the past, there weren’t a lot of solutions for this, because other firms that would “help” you out with the need would typically say “We’d love to help with this. We’ll buy you right now!” Even if you didn’t want to sell yet! Or they’d say, “We’ll tuck you in and you can become an employee,” which if you’re an independent advisor, and have been one for decades, is really hard. It’s really hard to go back to being an employee when you’ve been a self-employed independent for years or decades while building your own business!
The good news, though, is that there actually are a growing number of what I’d call “pure exit planning solutions.” For instance, Focus Financial does a version of this where they’ll pair advisors to one of their other local firms. They call it their Focus Succession Partner Solution. You get paired up with a local firm in your area that’s larger than yours and could acquire you, but you don’t get acquired now. They sign a contingency deal that says, if you pass away or retire, they execute the purchase. So you get to keep getting your practice until, by choice or circumstance, it ends.
In point of fact, our firm Pinnacle Advisor Solutions has a similar option. Our team calls it PRISM. But similar to Focus, you as the founding advisor sign an agreement with our firm that says “in the event that you pass away or have a health event, we will buy out clients and continue to serve them and give them the continuity.” So, your clients know they’re not just dust in the wind if something happens to you, and it gives them confidence that they’re getting a stable solution.
Now, to be fair, it’s worth recognizing with these exit planning solutions, if you don’t sell your business until the last minute, you probably won’t get top dollar. There’s a question coming in from Andy [from Periscope]:
“Is the payout lower than typical?”
Yeah, you’re not realistically going get top dollar. Or, actually, what happens for most of these deals is that they’re done on an earn-out basis, where you’re paid based on how many clients actually stick around. So, if all of your clients really do transition to the firm after you pass away, you’re probably still going to get a very competitive price. But realistically, it’s harder for you to transition all your clients if you’re not there to help transition your clients! So not all clients will likely retain, which means the net payout will likely come out being a little bit lower. Even if the bulk of your clients utilize the continuity solution, it’s still probably not as many transitioning as would have occurred if you were hands-on facilitating an acquisition.
But the caveat from the flip side is that with an exit planing solution, you continue to get the income checks from your practice each and every year you’re still practicing! Which, frankly, for most advisory firm owners – particularly if you’re a successful solo advisor – is going to net you more money anyways! In fact, I believe that one of the primary reasons why more solo advisors aren’t selling is that when you look at the math, at what you could get for selling your practice, it is usually what you make every two or three years (and sometimes shorter). Which means you could sell your practice, or stay in it for two more years and get the same money and then still own the practice two years from now and you can sell it then. So not very many people sell!
But at some point when you can’t do it anymore, it’s nice to get a terminal value, especially if you can also demonstrate the continuity for clients so you can continue to grow and keep clients aboard in the meantime. I think that’s what these exit solutions fit.
Consider Offering Hourly Financial Planning For “Transactional” Engagements [Time – 11:46]
The third option I think you have… my last idea for how experienced advisors who are retirement age and struggling with age bias from younger clients… is to consider a different kind of business and service model.
As we’ve discussed, I think the fear for most clients in hiring you as an experienced advisor for an ongoing relationship is that they’re not certain how long you’re going to be around in that long-term relationship. Either in Don’s terms, because they’re afraid you’re going “drop dead”, or even just that they’re worried you’re going retire in a couple of more years when they still need help as clients.
The key is that while relationship-based financial planning is certainly where most of us focus, it’s not the only kind of financial planning. There are advisors out there that do financial planning on an hourly and project basis. They provide their expertise and get paid to answer questions, but it’s more transactional. Clients come in, ask their question, you share your expertise and your knowledge and your wisdom, command a healthy hourly rate if you’re an experienced advisor, get paid for your time, and move on.
From the perspective of the potential client, this takes away a lot of the relationship risk and age dynamic. Because they’re not engaging you to be their ongoing manager for the next 17 years. It’s a transactional engagement. “Hey, I’m trying to figure out when to take my Social Security. I just need someone to help me through that decision.” And you can work with them and get them an answer to that. But that’s where it ends.
In this approach, even if clients have repeated questions over time, they don’t have the same kind of long-term relationship risks. Which means your age should be more of an asset (as your experience gives you valuable wisdom and knowledge to sell) and less of an age-bias-driven blocking point. Because you’re engaging clients in a business and service model that’s more limited in scope in the first place.
Resolving The Client Fear “What If Something Happens To My Advisor?” [Time – 13:30]
But the bottom line is simply that if you’re doing long term relationship based financial planning, I do think clients have a right to ask the question: “What happens to our financial planning relationship if something happens to you?” And you can address that in a couple of different ways as an advisor.
You can establish an internal succession plan with a paraplanner and associate planner, where clients are served by a team, which means it’s less risky for the client if something happens to you personally. Because the business can live on and continue to serve them.
Or you can sign an exit continuity agreement with an outside firm, like Focus or our own Pinnacle Advisor Solutions. We’re seeing more and more advisors do this. It’s a backstop for the business and for clients to know that if something happens to you, there’s still continuity. In fact, the whole point of these deals is that you tell the client upfront:
“You may be working with me, but ultimately I’m backed by a much larger firm, Pinnacle Advisory Group. They have $1.8 billion under management and they’ve been doing this for over 20 years. And if something happens to me, there’s a whole team of 50 back there to make sure that you get the continuity and that you’re not harmed or adversely impacted, even if something happens to me.”
In other words, address the client fear up front.
Or you can shift your business model – who you serve and how you charge them – to engage in more transactional financial planning, by focusing on hourly and project advice. Find other ways to serve clients with meaningful financial planning, that doesn’t take on the scope of a long-term relationship that the advisor may not be around long enough to fully deliver on (or at least where the client fears that may be the case).
So, I hope that helps a little as some food for thought! This is Office Hours with Michael Kitces. 1:00PM East Coast Time on Tuesdays. We got started a little early today because unfortunately I’ve got a conflict at 1:00! But thanks for joining us. Hope this was helpful, and have a great day, everyone!
So what do you think? Are you an experienced advisor who’s faced age bias from younger clients who didn’t want to hire you? How do you address their fear that you may retire when they still need you? Do you have a solution in place to ensure continuity for clients if something happens to you, that you can use in your marketing process to allay new client fears? Please share your thoughts in the comments below!