Executive Summary
For many next-gen financial advisors who start with or move their careers to an established firm, eventually earning an equity stake in that firm can be an exciting prospect and is often a major career goal that many advisors aspire to achieve. However, when these aspirations are delayed or blocked by senior advisory firm partners who choose to delay their retirement plans, it can leave younger advisors frustrated and in a place of uncertainty about their futures with their firm.
In our 119th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how frank conversations between younger advisors and firm owners about succession plans and career-track expectations can mitigate the repercussions of retiring advisors who may reconsider their original plans to retire or scale back from firm activities.
As a starting point, it's important for younger advisors to acknowledge that for many long-time financial advisors, their professional success and lifelong career experiences have become an integral part of their personal identity. Whereas many senior advisors can spend decades developing client relationships and honing their craft, it can be challenging for them to transition to a lifestyle where their main focus is no longer on working with their clients. At the same time, it is also important for firm owners to understand the frustration a rising financial advisor may experience when their own goals and career aspirations are sidetracked by unexpected delays in the retirement plans of senior advisors and partners.
However, having candid discussions about the firm's succession plans and how they mesh with newer advisors' career goals can be the best way for owners, retiring advisors, and successors to understand each other's perspectives. Such discussions can help ensure that the firm's succession plans best support all interested parties, whether that means adhering to the current plan or amending the plan with compromises, which could entail offers of partial equity or decision-making control to succeeding advisors or gradually scaling back the engagement level in firm activities by senior advisors. And if a mutually acceptable plan is not agreed upon, having direct, upfront conversations about the process will better position the succeeding advisor to determine whether to part ways and pursue a new path on their own or with a different firm.
Ultimately, while firm owners and next-gen advisors may have very different opinions on what succession means to them and the timelines that succession plans may follow, allowing all interested parties to clearly communicate their priorities and expectations can help the firm customize a plan that can support everyone's goals, or at least maintain clear communication to ensure that potential successors will be able to decide if the firm's goals align with their own or, if they don't, whether it would make more sense for them to part ways. Because when a workable succession plan is created, it not only helps the firm owner ease into retirement when they are ready to do so, but it also gives the succeeding advisor the opportunity to set realistic expectations around fulfilling their own career goals – potentially furthering the firm's legacy for years to come!
Authors:
***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Show Notes
- Kitces & Carl Ep 118: (Re-)Building Your Financial Advisor Identity When You Dial Back Working With Clients
- Kitces Report On What Actually Contributes To Financial Advisor Wellbeing
Kitces & Carl Podcast Transcript
Michael: Well, hello there, Carl.
Carl: Greetings, Michael Kitces. How are you?
Michael: I'm doing well. How are you? As we are now, like, well into the summer season.
Carl: So fantastic. It's just so good. Everything's fantastic! The people who were supposed to redo a little bit of work on our landscaping 18 months ago showed up today.
Michael: Oh, well, that's a good change of pace. That's a good change of pace.
Carl: Yeah, it's good. I literally was like, "Oh my gosh, you're here."
Michael: Yeah. It gets different for us in the D.C. area because this is actually not a particularly nice time of year. DC is great in the spring and the fall, but summer, it's just hot and humid, and gnat-y and mosquito-y. They kind of built this thing on a swamp. So, not really a great time to be in D.C. unless you stay indoors and air-conditioned. But the spring was lovely, and I'm looking forward to the fall when we get to the other end of this.
Carl: Yeah, that's the secret about the mountains in Utah. People come to ski, but they stay for the summers.
Michael: Nice.
Carl: Yeah.
How Advisor Identity Can Affect Retirement Plans [01:12]
Michael: Nice. Well, I guess ironically, that's actually slightly fitting to the theme I wanted to talk to you about today. So, periodically, we go out on social media and ask, what does everybody want us to talk about? What do you want to hear us talking about? And we got a great response from advisor named Ryan who said, "Hey, what I like to hear you guys talk about is what you do when there's an older advisor who is not so engaged in growing the business anymore to let go and retire." So, given the season's conversation earlier, I feel like we kind of have a seasonal rotation connection...
Carl: Nice, nice.
Michael: ...here. I wasn't even setting up that way that really just happened. Immediately, this is incredibly common across the industry, right? The firm that's on like the 7th year of their five-year succession plan, but now it's really going to be 5 years from here, and all the advisors are like, yeah, I'm not waiting until year 12 to make this happen. And frankly, I'm not even sure it's going to happen in year 12 because we're already on the 7th year of the five-year original succession plan that's still queuing up now. This phenomenon of just not with saying all the industry media of we're supposed to have this wave of advisor retirements and a shortage of advisors because of it. And I don't want to entirely argue against the demographics as destiny kind of thing, but in practice on the ground, I hear a lot more stories like Ryan's. I joined a firm because the advisor was supposed to retire, and I was going to be the succession plan, and they're not really letting go, or right from the advisor, and like, they're not really getting out of the way. And what am I supposed to do? And so, I think it's a great question just that Ryan frames, what do you do? What do you do in that situation? So, I don't know if you have thoughts either of, what do you do? Or just, why is this so common in the first place?
Carl: Yeah. There is an old saying, I was just trying to remember that. Well, it was regarding science. It was something like science progresses 1 funeral at a time.
Michael: Yes.
Carl: Which I think is just such a... Our industry succession plans will happen, changes will happen 1 funeral at a time.
Michael: Yeah, I think that was Max Planck for some reason. I don't know why I remember reading that somewhere.
Carl: Yeah. Certainly wasn't me.
Michael: But that whole phenomenon that people cling to the way of they've been doing business as long as they're doing it, and it's only when they actually get out of the way and new people come in that that things change, which I think actually is a good metaphor for the industry overall. The advisor industry only evolves 1 advisor retirement at a time.
Carl: Yeah, and it's really...
Michael: Firms don't change a bunch once they're established, they tend to ride it out where they are. Firms change when founders leave and new owners come in.
Carl: Yeah. But it is really interesting how common this is. I was just trying to think back to the 1st time I heard that, and it's got to be 20 years. And how often you hear that story. I was just thinking of a close friend in the UK, same exact problem. We're going on like 15 years of a 3-year. So, I don't have much experience with it other than the identity piece, which I just think is interesting on both sides of this discussion.
Michael: Yeah, we talked about this last episode with what it's like when you're going from advisor person, like client-facing advisor to advisory firm leader. What does that mean? If you're not client-facing anymore, can you still call yourself a financial advisor if you're "just the CEO now," but you don't have clients anymore? What does that mean? So, you think of this as another version of it, right? Can I still be a financial advisor if I retire?
Carl: Yeah, it's the only thing I'm qualified to comment on from that perspective. It is just so interesting from both perspectives of, so first of all, the firm owner who's continuing to delay. I guess the thought would be, can we have some real dialogue? And it's okay to say you're unsure, but it's not really okay to keep making sort of a commitment and changing your mind. And I'm never planning on retiring. So, I'm not in any way encouraging like, get out. But you know that to me, the ideal, and I've seen a couple founders do this, where they just become slowly and slowly they just get rid of more and more of the stuff they don't like, and they're just doing the stuff they really like, which often is sort of like, come in, say hello to the clients when they come. Be in the meeting for a little bit and then leave, and they just love it.
It's like that they get to keep the relationships. They get to read the Wall Street Journal someplace other than their home. They're sort of like the, what would that be called? Godfather's not the right word. That's actually definitely not the right word, but sort of the patron saint. I don't know what the right word is, but you greet people. There's a way to design this, so that you still have some role, and you might be doing a thing that matters to you, and you can slowly give the really important things. That's a lot of work internally around identity. And then... Go ahead.
Why Committing To Retirement Can Be Difficult For Advisory Firm Owners [07:20]
Michael: I'll just say, I think you do get it, some of the, at least what to me is the crux of it, which even when I hear advisors talk about this some time from their retiring and like, oh yeah, I'm working on a succession plan. I'm getting ready to retire. One of the things I usually ask is, why? Why would you do that? This is a great business. It's a great business to be in. Now, granted, as we always say, it's sucky in the 1st few years, it's rough for the 1st decade. One of the biggest themes we had from the last study we did on advisor wellbeing is just how many years you've been doing it is one of the biggest predictors of wellbeing. The longer we've been doing it, the happier we tend to be in our businesses. Actually, there's 2 things that correlate most heavily with the years of experience of an advisor, how much you make, and how happy you are.
Carl: Shock.
Michael: And so, yeah, for a lot of advisors, if you've been doing this that long and you're 20-plus years in, it's like, so let me get this straight. I'm at peak income and peak happiness, so I should walk away. Why? Now...
Carl: Right. And that's going to work really well.
Michael: I know there's a bunch of people who are like, yeah, get out while you're on top. Okay. But getting to reality for most people financially. You are making really good money. You may not be working a ton of hours at that point because you've got a pretty established clientele. They're mostly in maintenance mode. You're not necessarily in heavy growth mode, which is where the heaviest lift of the working comes. Frankly, you built your reputation enough that you're probably still growing decently because referrals come to you organically after 20-plus years in your community with your client base. So, to me, just the starting point of this whole conversation, we keep framing up that when advisors, someone gets to like 62, and they're eligible for social security, they're supposed to retire and get out of the way and let go.
And to me, there is just, I don't know, a question I sometimes get to for the industry and the aggregate like, why is that even the assumption? Why is that the baseline? Why doesn't our model look more like, frankly what you see in a lot of other professions, law, accounting, medicine, where, as long as the mind is able and the body is able, why wouldn't you stay around until your 70s? So, how many advisors are we going to see who's still practice in their 80s? Technical advances keep making it possible. This whole idea, you should be happy to retire because you're at peak happiness and peak earnings, I'm not surprised that succession and exits are turning out to be more challenging in practice. The whole industry has said you're supposed to get out of the way. And then I find a lot of advisors, they get there and like, why would I walk away from this?
Carl: Yeah. And I also think it's the same for all humans. You get to that point where you're supposed to do that, and you look over the other side and you're like, what am I going to do? And I think it's wise to be... I mean we all know this. Retirement as a concept. How many of our clients that actually go full gas till they're 62 and then pull the plug in golf, end up happy, compared to the ones that go do something like teach, or I think you mentioned law, right? Of counsel. It's a beautiful model. I'm still around. I've got all this skill and insight and wisdom. Why wouldn't I let that compound? I was just listening to a story about somebody 92 years old started his 1st venture capital firm, and only makes 20-year investments. I want to hang out with that guy.
Michael: I like that guy. He has my long-term mindset.
Carl: By the way, his relationships have gotten better, he has more time. It's not that you're working more, it's just that you're doing fewer, fewer things that you really love. So, that's the mindset from 1 side. So, what do you do? What does the owner do? Well, have some more honest conversations, but what does Ryan do? That's the big question. Was it Ryan?
Michael: Yes. Yes. It was…
Carl: Yeah. What does Ryan do?
Michael: It was Ryan. Well… So, I have to take 1 pause. Before we get to Ryan, just there was something that you said about the firm owner that I wanted to come back to because indirectly it gets to Ryan's situation. You had said, I think something to the effect of just, “Hey, whatever you do, stop leading the associate advisor on. If you're unsure, it's just okay to say I'm unsure. I'm not sure when I'm going to retire because, hey, I'm kind of having fun enjoying it. So, I'm not sure when I want to retire.” To me, part of the challenge is, I'm not sure it is okay to say I'm unsure. Because for a lot of advisors, the younger and the successor and like Ryan's, and I'm presuming he's a successor from the context of the question. Ryan signed up to be a succession plan. I'm unsure now is kind of changing the rules of the game. Now, yes, it's going to be 3 more years. No, no, now it's 3 more. No, no, now it's 3 more. No, no, now it's 3 more…
Carl: Right. As opposed to that.
Michael: …also is changing the rules of the game. So, neither of these are necessarily positive, but I think a lot of older advisors are fearful, and rightly so. If I come and say, "Hey, you know what, I'm changing my mind. I'm not sure if I'm going to retire." Then the Ryans of the world are going to nope out the door. And now all of a sudden your practice is not as fun and happy as it was before because now all of a sudden a lot of work that you had delegated to the Ryans of the world is coming back at you, and all the time and training and energy you put in Ryan is coming back to you, and you don't necessarily want to start that process over again because it's been 3 or 5 or 7 years of going down the road with Ryan in the first place.
And I do see and hear a lot of fear from advisors who have gone down this road like, look I brought the successor on because everyone says you're supposed to do that and I did it. But now we're getting close to the transition, and the truth deep down is I don't want to, but I also don't want to go back to the pre-Ryan days of being a pure solo again. And so, I'm stuck. I don't know what to do. So, what's the most practical thing I do? I gently keep kicking the can down the road. Not because I'm trying to be mean, but just I don't want to lose Ryan. If I tell him I'm not leaving, he might go away, but I'm not ready to actually transfer it to him yet. And so, we get stuck in this drawn-out environments that Ryan and the other Ryans of the world I think are commonly getting trapped in.
Why Communicating Retirement Expectations Is Key In Succession Plans [14:13]
Carl: Yeah, completely. Listen, let me clarify if that was confusing in any way. What I'm saying is if you're pretty sure you're just going to keep kicking the can down the road, you owe Ryan an honest conversation. And part of that conversation would need… have to be, if you're self-aware at all, would have to be, "I realize this is a change, and it may mean that you want to make a change. And I would love to keep you here.” And the other thing I was just thinking of, as you were describing that, so, that's what I meant. Is let's not keep leading people on if we know you owe it to them to have an honest conversation. And part of that conversation's going to be the acknowledgment that they may leave.
One thing I really think is smart is all humans, my best projects have always been a 3rd option when I thought there was no 3rd option. We frame these things as binary decisions. It's either yes or no, and we get stuck in yes or no. And we spend all this time around sort of debating yes or no, or researching yes or no. When I love the idea of being like, "Hey, you know what, can I just be honest, Ryan? That was fully my plan, and now I get here where I'm sitting now, I'm like, I don't like that plan anymore. In fact, I don't like it enough that I got to do something different than what you and I talked about. And I realize that may mean you leave, and that would be yes or no framing. But I'm curious, just before you go do that, and before I make any decisions, is there a 3rd way here? Is there some unwritten rule that it has to be yes or no?" No. "Is there a 3rd way? Could we divvy up responsibilities a little better? Could we peel off a segment of the client base that you could grow the way you want to? Do I allow you to try some marketing? What is it that you're really after here? Was it ownership equity? Was it autonomy and decision-making? Was it that you wanted to do things in a different way? What are you trying to solve for? What am I trying to solve for, and is there a way that we could do that together, a 3rd way?"
Michael: I like that framing. Because the reality is even for advisors that come in for succession plans. I mean I've seen the full gamut. I'm sure you have as well. Some they want equity, they want to own something, right? It's that sort of entrepreneurial drive, I want to own and build something. For some, it's not, it really just comes down to, I want to have a say in how things are done around here. And the way it currently works is you're the owner and you have a say. So, apparently, if I want to say, I need to be an owner. And so, it's not actually about being an owner, it's about having a say. So, okay. Then let's have that conversation. And yes. Many times it's the others that you said as well, right? Someone just wants to stretch their wings. Someone just wants to try their own thing within a safer environment, but have a little bit of room to try their own thing and not be totally buckled down into owner's way or the highway.
Carl: Yeah. I agree.
Michael: So, I want to come back to the Ryan end in a moment because that was where we set this up from the start. Now that we've gone down the road of the more senior advisor as well who may be on this path. I do feel like there's sort of a follow-on conversation that has to happen for that senior advisor that's having this realization of, okay, maybe I don't want to retire and be gone, right? I like the income, I like the identity, I like what I do in the business, particularly now that I got to delegate some stuff. I don't want to vanish and ride off into the sunset, is reflecting that person, yes, but if you are so concerned that Ryan's going to leave because you don't want to have Ryan leave, and have to go back to not having a Ryan or finding a new Ryan, just recognize you have to do something that provides for momentum for Ryan.
Stringing Ryan along ultimately just builds tension. It can build other negativity. It risks not only having Ryan leave but having Ryan leave angry. And if Ryan leaves angry, he might do things like, darn it, I'm taking all these clients with me because I'm resentful, and now other problems happen in the business. So, just would caution a person like, if you don't want them to leave, you do have to do something if you want them to stay. And maybe it's different than the, I thought 2023 was going to be the year. I was just going to sell everything and exit. Now I've gotten to 2023 and realize I don't want to sell everything and exit, but okay, can you sell 10%? Can you sell 20%? Can you create a plan that you're going to sell 10% or 20% a year every other year for the next couple of years? And so, maybe Ryan isn't going to own the whole thing at the end of the year the way that he thought, but he's got a path to ramp up over time. You are dialing back, you're shifting the equity to him as he does take on more responsibility. But you don't have to vanish and your income doesn't go to 0. But if you want to share this going forward, recognize you may need to at least share some of the pie.
Carl: Yeah. The thing that I think is always so interesting is when we get fixated on 1 side of the decision, we forget about the trade-offs that we're making on the other side, and you lay those trade-offs out really well. If Ryan leaves, now you got this whole pile, and you will want to retire because you'll be back to doing all of this stuff. So, just keep in mind that they both come with tradeoffs and which 1 is the 1 that you're willing to invest in, right? Which tradeoff are you willing to put some energy and probably sometime and capital behind? Make the tradeoff.
Why Finding Purpose Beyond Retirement Can Ease The Succession Process [20:19]
Michael: So, from Ryan's end, there's sort of 2 things that crop up to me. So, the 1st, Carl, I know you've seen this as well in the client context. There are clients who are retiring from something, and there are clients who are retiring to something. And they show up really different between whether you're retiring from or like, hate my job, hate my company, got to get out of it. I just need to be retired, I got to get away from this, versus the folks that are retiring to something. No, no, it's not about getting away from my company. I've got grandbabies now, and I'm getting really involved in this association, and I'm really excited with some charitable work with my place of worship, whatever it is. It's the clients who say, I'm retired, and I'm busier now than I was before because they had things that they were retiring to, and they immersed themselves when they retire into them. So, in this context, I find with advisors in particular, unless there is a health issue, or a super broken messed up practice, almost no one retires from financial advising. We're not exactly a hard labor, my body's wearing out, I just can't take this anymore. I got to get out kind of profession.
I see very few advisors retire from their financial planning practices. They retire to something else. So, when they retire to something else, and they've got enough because they saved enough, or they got enough from profits, or selling the practice will get them enough. If I've got something to retire to, and I've got enough, then I'm good, and I make the transition, and the Ryans of the world get their shot. So, from Ryan's end, the 1st conversation I would be having or trying to explore is talking to your senior advisor, opening the conversation of like, “Hey, do you have plans for what you're going to do after retirement?” Because if they say, “No, I have no idea,” that's why they don't want to leave. Because they know exactly what they do now. They like it, they enjoy it, they make good money at it, and they don't know what they're doing on the other side. So again, why would you leave that? And ultimately, to me, part of what you're building towards is if you can't help that senior advisor paint a picture of what they're retiring to, they have no reason to let go and get out of the way. Why would they?
Carl: Yeah. I think included in that could be a different definition of this whole word retirement. Imagine a 3rd way, right? If you could have somebody who has the kind of experience and even maybe "more important relationships," they're just getting to the point where, what's the word we used to use when we were in the old brokerage industry, and you were the one that went out and found business. What were you called? I can't remember the...
Michael: The Finder? Finder, miner, grinder, that framework. You're the finder.
Carl: No, it was like, it wasn't producer, but it was something where they were... Anyway, they're known in the community. I wonder if there's another way. Like, hey, you really like golfing, and you really like being in for some of the early introductory meetings, and that's insanely valuable to me as a younger advisor. Is there a way for us to think about this a little bit differently instead of you just riding off into the sunset? Could we structure this in a way where we can take advantage of the impact that you've had for 20 years? I want you around, but I also want to do planning this way. Can we find a way where you're doing the thing that you're super good at and that you happen to love for another 10 years, right? I also think that's a conversation around painting where are you headed to? And then obviously, at some point, if it just becomes obvious that this is not going to work unless they get out, and they're not going to get out, well, you know exactly what you have to do, right?
Michael: Yeah. To me, the 2nd part of a conversation is, for anyone in Ryan's situation, are you ready to leave? Hoping that's not necessary, but are you ready? Would you really cut bait and leave and go and start over, or do whatever it is that you have to do to find your next step if it's not the firm here? A, it's good to have that clarity. Because at the end of the day, you're only going to push the conversation so hard if the truth is that ultimately you're going to acquiesce to whatever that senior advisor decides anyways. And secondarily, just I find for a lot of people that go through this, there's a confidence that comes when you can come to the conversation saying, I really want to make this work, but if it doesn't, I will leave, and I know that I will be okay. I don't know if you'll be okay because you're not ready to do all the work that I've been doing for you for the past 7 years. But I know that I will be okay. So, given that I'm really ready to leave, but don't want to, let's talk about how we can make this work.
Carl: Totally. No...
Michael: Because at the end of the day, if the senior advisor knows that you are not leaving, they don't really have a reason to have to change and that sucks, but that's kind of the reality for it. So, for the Ryans of the world, you need to get clear on whether you're ready to leave and then hope you never need to. And the senior advisors need to recognize that if you don't solve for the Ryans of the world, they may leave, and you don't want them to, right? It's one of these, no one wants this relationship to end, and you need to have the conversation to recalibrate the terms. But everyone needs to get clear about whether they're willing to break up or not, or you don't really know what you're coming to the negotiating table with.
Carl: Yeah, totally. I'm hesitant to say this because I don't know that it's useful to anyone except for me. But what I want to encourage is patience. And I know what I would've done, which is like I'm the least patient in terms of these things. I'm the most risk... I have no problem. I would have no idea if I was going to be okay, and I would still jump, right? And I'm not encouraging that.
Michael: Yeah, I can't do that at all. I have...
Carl: I know. We’ve had this discussion before.
Michael: There would be a spreadsheet with household projections for multiple years before I took that kind of action.
Carl: There's no spreadsheets, right? I feel like jumping, let me just double-check. Do you really feel like jumping? Yes, jump, right? And I'm not encouraging that, I'm just simply saying, I also know, I've had so many conversations lately with people who, I want to use that overused matrix examples. Is it the red pill?
Michael: Yeah, red pill, blue pill.
Carl: Yeah. They took the red... I've had so many conversations with people who've taken the red. There's no going back once you've made that decision that you just have to do this, there's no going back. So, the question is just get yourself into a place where you're confident that it's going to work as soon as you can and then jump, right? For you, that was much more thoughtful. For me, it was much less thoughtful. There's more than 1 way to do it. At some point you just have to be like, this is clear. I'm just delaying a really painful thing. I'm going to get out. But that's after. Especially after all the third-way exploration you could do. There's so many options here. Don't get stuck in this binary thinking. There's so many options to explore.
Michael: To me, the biggest takeaway is just, you have to have the conversation. You have to sit down, have the conver-, "Look, this isn't working for me the way that it's going right now. I want it to work. I'm excited about the opportunity, but we said we were going to do this. We're not there. So, clearly, the rules of engagement are changing already. Let's talk about how we can make this work for everyone."
Carl: And you can always use the, it's me, not you. We can...
Michael: No, but Ryan's pretty clear, it's them, not him.
Carl: We can pull out all the "how to end a dating relationship" lines that you want. It's fine. It's the same thing. It's fine. Everybody will be fine.
Michael: Or they'll break up, but then they'll still be fine.
Carl: They'll be fine too. Very good. So, much fun to talk about these things. And I guess my last reminder is just, please know you're not alone. I can't believe how long this conversation's been going on, and how often it comes up. And this is just 2 humans, hopefully, in good faith trying to do the best they can. And there's got to be a way. And if there's not a way, hopefully, we can do it with high fives and hugs and everything will work out, right? Let's just do the best we can.
Michael: Amen. Thank you, Carl.
Carl: Amen, Michael. Cheers.
Michael: Cheers.
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