The baby boom generation is made up of 78 million Americans born between 1946 and 1964. The oldest of the boomers turned 65 last year; the first of millions of people who will retire over the next couple of decades. For the financial services industry, this powerful demographic trend will drive the types of investments advisors will need to hold in their client accounts. It will also affect those working in the industry, as many baby boomers also chose the financial services industry as their profession.
SEE: Top 10 Investments For Baby Boomers
The Longevity of Your Business
All businesses need to deal with succession planning, but the fact that financial advisors are facing changes in how they invest with ensuring continuity in their business is complicating matters. For starters, an advisor that is part of the Baby Boom generation is highly likely to have clients that are similar in age. The good news is that life expectancies continue to rise. One recent statistic estimated that an individual who is 60 years old today should live around five years longer than if the individual was born 30 years earlier. These days, life expectancies run above 80 years for both women and men.
This is obviously great for individuals, but creates quite a bit of longevity risk or the risk that retirement savings don't last long enough. Combined with record-low interest rates and stock market returns that have been dismal for more than a decade, financial advisors are faced with difficulties in minimizing longevity risk for their clients.
SEE: Top 3 Retirement Savings Tips For 55- To 64-Year-Olds
Passing Your Business on
For advisors contemplating retirement themselves, there is likely going to be a need to either sell out to another firm or consider bringing a younger professional on board who can eventually take over the book of business. A recent survey relayed by The Wall Street Journal revealed that more than 40% of advisors lack a written plan detailing how their business should be transitioned or managed when they are gone. The article went on to suggest that these companies should offer buy agreement options for younger advisors in the firm, such as the opportunity to buy into the advisory business over a term of five years.
Providing opportunities for equity ownership works for public companies and can apply to private firms. It can be an incentive to reduce employee turnover, but can also serve as an important tool for an eventual business transition. With a number of employees and future potential owners, this method can also lessen the need for an individual to come up with capital that can easily run into the hundreds of thousands of dollars. With many millions under management, the cost can be even higher.
For complete transitions, both parties should look to complete a buy-sell agreement that stipulates as many of the succession details as possible. For example, what if a client chooses to go elsewhere, instead of working with a younger professional? In the investment advisory business, personal relationships are extremely important and can make transitions especially tricky.
Housekeeping details, such as transitioning files, including client contact information, account statement histories and billing details in a timely manner, are important. It may also be extremely beneficial to keep the original owner around to help work through the transition with clients, if possible. Other important considerations include the possible death of the founder, any unforeseen departure of the original owner, important employees or clients, and how to resolve any disagreements that might arise during the negotiations or after the paperwork has been finalized and the ink has dried on the signatures.
SEE: 5 Services To Usher In New Clients
The Bottom Line
Succession planning activities are never easy. Coupling them with challenging market conditions in the financial services space has only served to complicate matters these days. However, with an effective plan, all parties involved in transitioning ownership can minimize risks and disagreements.