Inside a small sandwich shop about two years ago in Huntsville, Ala., Wade Sadler made up his mind about how he was going to retire.
The Raymond James advisor was having lunch with his colleague and friend Luis Garcia. Sadler, 67 at the time, told Garcia he was trying to figure out how to retire.
"I know a lot of people who work into their 70s. But you've got to know when you're ready," Sadler says.
Sadler and Garcia had collaborated on some small accounts in the past. After talking it over, they hatched a plan. Months of work and hundreds of client meetings followed. By mid-2014, Sadler retired and Garcia's AUM jumped to $225 million (it's $260 million today) from about $105 million.
Their efforts to transition an entire book represent both a challenge and an opportunity confronting the industry today: Who gets the clients when advisors retire?
BUYING OPPORTUNITY
About one-third of all advisors will retire in the next 10 years, according to research firm Cerulli Associates. Younger advisors can find unparalleled opportunities in this demographic wave to grow their business by inheriting their elders' books.
"The problem is that, as you're going through the daily grind, you are not really looking around at aging advisors in your office," Garcia, 50, says. "This kind of just happened, but it turned out so well."
Firms, meanwhile, have been maneuvering to encourage younger advisors to inherit more books of business, rewriting policies and freeing financing in a bid to ensure smoother client transitions and that assets stay put.
But setting a price and moving clients is no easy feat, say many advisors who have been through the process. It takes hard work and skillful negotiation. Here's how older advisors are successfully exiting the business today, while their juniors keep it thriving.
LET'S MAKE A DEAL
A few firms do not allow their advisors to buy or sell books of business, choosing instead to offer incentives to retire in place while the firm parcels out their clients to other advisors. For those who can, selling or buying a book offers a great way to cash out or double one's business, advisors say.
But what's the right price?
Advisors who have bought books say there are several elements to evaluate, such as business mix, size (both AUM and number of clients), client demographics and personality.
Fee-based business can be worth more than commission, says RBC advisor Stefen Thielke, who has acquired two books. "If you retain it, then you've got a business that already has recurring revenue," says Thielke, who is based in Stillwater, Minn.
The size of a book also matters, and not just because a higher AUM commands a higher price. A huge number of clients will mean more work during the transition.
Mark Heiden, an advisor at Wedbush who's bought two books of business from retiring advisors, notes that clients' personalities are often a reflection of the broker they work with.
"If you are buying a book from a really nice guy, his clients are likely to be like him," says Heiden, whose AUM has grown to about $300 million from $200 million.
Another key factor: Do clients have unmet needs, such as estate planning?
"That's where you look for revenue opportunities that haven't been uncovered, and the reason that they haven't is because the advisor maybe didn't have the opportunities or energy to do so," Thielke says.
Taking into account factors such as these, a typical price is around 100% of trailing T12 production, advisors say.
PAYMENT PLAN
In recent years, some firms have retooled their policies and made financing available to facilitate transactions. For example, Raymond James introduced a revised program two years ago. Advisors at the firm now have two routes: They can agree on a one-time payment (Garcia and Sadler's choice) or stretch it out over several years, says Tom Walrond, COO of Raymond James & Associates' Private Client Group.
Sadler says he and Garcia accepted the valuation Raymond James helped establish. Garcia adds that he also wanted to respect Sadler's exit from the business: "It was his last rodeo, and I didn't want to nitpick over nickels and dimes."
Raymond James can finance transactions like this in the form of a promissory note, but with the caveat that the firm will evaluate the deal before writing a check.
For example, if an advisor says he's willing to pay $20 million for a book with $1 million in revenue, then Raymond James won't back the deal, Walrond says.
Advisors can agree to pay extra beyond what Raymond James is willing to finance, Walrond says. The overall arrangement allows "Raymond James to participate and help, but at what we feel is a reasonable set of assumptions," he says.
Other firms have similar plans, and management has been trying to educate advisors on what options are available. "People make smart, wise decisions once they understand the issues," Walrond says.
A few firms have also taken steps to encourage their advisors to recruit retiring advisors from outside firms. RBC's three-year-old program has been utilized "many times," says RBC Wealth Management's Tom Sagissor, a divisional director at the Toronto-based firm. He says the program meets the needs of older advisors not interested in signing a nine-year deal, while also enticing younger advisors to seek growth opportunities. "It's an acquisition strategy similar to what every corporation in America does, but you've got to get advisors to think that way," he adds.
OPEN MARKETS
Some industry insiders question whether employee advisors are being rewarded for the true value of their business.
"I would tell any wirehouse advisor looking to retire in the next two to five years to seriously consider going independent first, because those wirehouse offers are enormously tax inefficient," says John Threlkeld, an independent advisor affiliated with LPL Financial.
Threlkeld has completed a dozen acquisitions since leaving the wirehouse space 12 years ago. He closed on his latest deal, a $70 million book, in September.
"Only in the independent channel will you find an appropriate multiple for a practice acquisition or sale," Threlkeld says.
Recruiter Mickey Wasserman notes that valuations may be higher in the independent space, up to 2.5 times trailing production, but he points to the difficulties of simply jumping ship to quickly sell and retire. Advisors making a move need to solidify their client base, which can take time, particularly if the assets are sticky, Wasserman says. Plus, your clients will need to get used to a new firm.
"It is not advisable to leave, go to an independent firm and then just retire. Your clients won't know what to think of that," Wasserman says.
As Threlkeld and others note, taxes are another arena where independents may have it better. Employee advisors generally get paid for their book as income and therefore miss out on more-favorable capital gains tax rates.
Dave Hanson, an advisor at St. Louis-based Benjamin F. Edwards, notes that this was a hurdle in his team's acquisition of an independent advisor's practice. The advisor had to join the team as an employee of the firm, and would therefore forgo payment as a capital gain.
But the older advisor interviewed Hanson and his team, liked them and saw that their practices were similar. Their clients even knew each other.
"The bottom line was that, after we met, we realized we were very much alike," Hanson says. They settled on a price, and Hanson says that his team later retained more than 95% of the clients.
Some advisors and experts say that the difficulty of finding the right fit may help explain that, while tax rates are more favorable in the independent space, there's no stampede of older advisors out of the wirehouse and employee firms.
"Finding someone good who will take over your client relationships – it's the last good service you can do for your clients," Heiden says.
THE HAND-OFF
Advisors who have been through it once, twice or a dozen times say the most difficult part of the deal is transferring the clients.
"The price is going to be a number, and you can get there a number of different ways, but it's going to be somewhere around one-times," Heiden says. "But transitioning the clients is almost a bit like gambling. Can you get them on board?"
Sadler and Garcia's first step in their plan was to rebrand as a team, G&S Wealth Management. They sent out introduction letters to the clients, and later another letter announcing Sadler's retirement.
While still servicing his original clients, Garcia had to master the details of the new clients' portfolios – getting deep into the investment weeds, he says. For example, though their practices were similar, some of Sadler's clients had annuities Garcia was unfamiliar with.
"It was a lot of late nights, a lot of work. If you think about taking your business and doubling your client base … well, it's a lot of long days," he says.
And it wasn't just work for Garcia. Sadler had a part to play, answering questions about the clients and portfolios, explaining 20 years of history in some cases. And there were numerous phone calls and meetings – Sadler had over 150 households in his book.
"That was a very hard period," Sadler recalls. "I probably worked harder those last six months than I did in the previous couple of years."
There was also the emotional component of ending a long career. "It was tough for him to tell his clients he was retiring," Garcia recalls.
From mid-January 2014 to Sadler's last day in May last year, Garcia tried to meet with every new client twice. "That runway was a little short, I'll tell you that," he says.
Even more important than those initial meetings was the follow-up after the transfer, when Garcia tried to call regularly and meet with clients again. He says this helped cement the new relationships.
Sadler adds an additional factor to the mix. When making the introductions between Garcia and the clients, Sadler was sure to note that he chose Garcia as his financial advisor. The clients "definitely wanted to hear that," Sadler says.
The hard work and long hours paid off; Garcia only lost five of Sadler's clients.
PAY OFF
Though he and Sadler did their transition in less than six months, that fast pace is not unheard of, according to industry insiders. Sometimes an advisor like Sadler is simply ready to exit, and sometimes outside forces intrude.
"Too often it's a fire sale because of an advisor getting sick or an advisor getting too old," notes Danny Sarch, president of Leitner Sarch Consultants, a recruiting firm. "You need to start before it's necessary to start."
But even with an accelerated transition, advisors can find some success. Garcia and Sadler's transition shared elements that other advisors say contributed to the positive outcomes of their own deals. For example, Wedbush's Heiden, who is contracting to do a third acquisition, also had the retiring advisor there for the client introductions.
"It lets him say nice things about me and lets me say nice things about him. It's a friendly hand-off," he says.
Acquiring advisors also say there are benefits beyond the boost in AUM. Hanson says his group appreciated learning how other advisors operate their practices. "It can be nice to have some fresh blood come in and show you a different, if not better, way of doing things," Hanson says.
RETIREMENT
Sadler, now retired, spends time with his grandkids, goes boating and rides horses. Although he plays golf with a few clients, he misses the day-to-day contact.
"It wasn't just a financial relationship. They tell you about their family and kids. So you get to be pretty close to them," Sadler says.
But he says the timing was right, and he found the right partner through their earlier work together.
For his part, Garcia says, "It was a great opportunity to help Wade, but it was a great opportunity for me, too. And it's got me thinking, I've got to hand this off someday."
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