(From the October 2021 Edition of eFORUM)
By Christine Timms
The ideal retirement age is not the same for everyone. Each advisor and their circumstances is unique, but vulnerabilities can grow with the age of the advisor, especially for those beyond traditional retirement age.
Many of the issues creep up so slowly that they often go unnoticed until something big happens to draw attention to the problem. The lack of awareness or acknowledgment of these vulnerabilities can hurt the advisor’s practice and the people they care about in many ways. The risks will vary with each individual advisor and their practice. I urge every advisor to think about how these risks could impact their clients, team members, personal situation, and family.
The older the advisor:
- The greater the likelihood that the advisor will suffer a personal or family health shock requiring them to quit work suddenly, leaving the client to find a new advisor or adjust to a new advisor chosen by someone other than the exiting advisor. This risk can be mitigated by a strong succession plan created by the advisor.
- The less capable they likely become. A study by Michael Finke and Sandra Huston of Texas Tech University and John Howe of the University of Michigan found that as people age, the ability to answer basic financial questions that include knowledge and the ability to apply that knowledge deteriorates. The researchers found that average financial literacy scores fell by 50% between the ages of 65 and 85. The rate of decline was the same after controlling for characteristics like education, gender, and wealth. However, the study also found that there is no corresponding loss in confidence in one’s ability to make financial decisions. Clearly it is difficult for anyone to recognize reduced abilities in themselves. I think we owe it to our clients to monitor our own capabilities when we get older.
Team Member Vulnerabilities
Team members’ current and future career plans are dependent on the advisor’s exit plans. They need to know if they will be taking over some or all of the practice. Alternatively, team members will need to know how they will fit into the team of the successor advisor.
The Advisor’s Personal Risks
The older an advisor is:
- The more their personal peace of mind may be affected by the stress of the many uncontrollable elements and changes in the financial industry (markets, compliance requirements, firm policies).
- The more likely business stress will directly affect their health.
- The more likely that travelling or working on their “bucket list” will become more difficult.
- The more likely it is that the people they wish to spend more time with will pass away.
- The more likely their practice becomes less valuable in the eyes of potential successors, thereby shrinking the value of their retirement nest egg.
Many of the advisor’s personal risks could result in reduced effectiveness at work. If your skills, attitude, or level of dedication deteriorate significantly, sooner or later you will be doing a disservice to your clients, your team, and your firm.
The Advisor’s Financial Risk
Besides personal risks, there may be ongoing risks to the practice itself. Let’s examine these risks.
An advisor’s reduced capabilities could lead to errors and increased liability for the advisor and their firm. How awful would it be to end your career in the crosshairs of regulators or being sued by a client?
As people age, it often becomes more difficult for them to keep up with technological advances. The pandemic forced many advisors to work from home with initial limited access to their assistants whom they may have been relying on for technology assistance. While many advisors may be comfortable with technology and virtual meetings, others may continue to be overwhelmed and unwilling to embrace the changes. The services these advisors offer to their clients might fall behind those of their competition.
Clients often start looking for their next advisor when they realize their advisor is nearing traditional retirement age. The clients and their families are aware of the client vulnerabilities listed above even if the advisor refuses to acknowledge those dangers. If no successor has been identified, aging clients may feel the need to take action themselves before they become less capable of choosing a good advisor. Also, an older advisor’s clients become more vulnerable to suggestions from the next generation to move to a younger advisor.
A good transition plan with an identified successor will mitigate the above risk. But waiting too long to establish a plan might cause doubts in all those involved (successor, team members, and clients).
The longer an advisor waits to retire, the harder it is for team members to stay interested and loyal to the advisor — especially if the advisor has toyed with their future by changing or never really setting a retirement date.
Also, the longer advisors wait to retire, the less access they and their successor will have to the clients’ next generation as they acquire their own advisors (unless they are already clients).
All of these ongoing risks can reduce a practice’s revenues and assets under management, thereby reducing the price potential successors are willing to pay. That’s because aging clients become less valuable to a successor (practice referral values are usually based on expected future revenue from each client).
Personal issues can lead to shortening the transition overlap period. Successors will not pay as much for a practice when the exiting advisor is unable or unwilling to participate in a significant overlapping service and introductory period.
I urge every advisor, especially those at or beyond traditional retirement age, to think about how these risks could impact their clients, team members, personal situation, and family. The best protection against all these risks and vulnerabilities is a well thought out and written succession plan, as well as a realistic departure date.
Christine Timms is the author of three handbooks for the financial advisors, including, Transitioning Clients and the Retirement Exit Decision. Visit www.christinetimms.com for more details. Christine Timms can be reached on LinkedIn.