A wirehouse advisor’s guide to retirement

All of the major wirehouses have established sunset programs which allow an advisor to monetize the business at retirement. Unfortunately, these programs typically permit little customization and contain provisions which tie the business to the firm.

The good news for advisors who have reached this point in their career is that options exist outside of the firms’ programs. So before signing on the dotted line, advisors should consider the future of their business, as well as the best way to ensure their own financial security.

As a starting point, advisors should ask themselves the following questions:

Do I want to leave my legacy at my current firm? 

The answer for some is an unequivocal “yes”, since it is the least disruptive and lowest risk option. Also, for advisors who have spent a career at a firm, loyalty and continuity are often cited as reasons for choosing to stay the course. Others feel that their firm has changed so much, they no longer believe it is the right place to leave their business and clients. These advisors will perform due diligence on other industry options to determine if making a move could represent a substantial uptick.

Do I have a team or have I identified a successor that I feel comfortable entrusting my clients to? 

Many retiring advisors struggle to find the right next generation for the business within their office. Oftentimes a different investment approach, style or work ethic will derail a potential teaming arrangement that looks good on paper, but in practice just doesn’t feel right. If a retiring advisor cannot find the right person within his/her own office, this will often prompt the advisor to look outside the firm to exponentially increase the number of potential “suitors”.

Do the economics work?  Do I feel I am getting fair value for the business and is it sufficient to support my needs for retirement? 

Although all of the major firms have enhanced their retiring advisor sunset programs, these programs pay an advisor substantially less than a transition deal from a wirehouse would, and less than what an advisor would receive by selling a business on the open market. That said, if an advisor feels that his firm is the best place for the business and clients, then retiring from the current firm – and in effect accepting a “lower valuation” – makes sense and provides the benefits of continuity and stability. Conversely, if an advisor feels that the firm is no longer the right home, then it is possible to achieve better economics by making a well-timed move prior to retirement.

I’m ready to “ride off into the sunset”…what’s next?

Even for advisors who answered “yes” to the above questions and anticipate that retiring from their current firm is the right choice, there are still some things to consider.

1. In order to be eligible for a wirehouse retirement plan you typically need to have formed a team at least 3 years prior to your intended retirement.
2. Payout to the retiring advisor generally extends, on a declining basis, for 3 to 5 years. The funds to buy out a retiring advisor’s business essentially come from the team’s production. Although the firm may advance or backstop these payments, it is not paying for the book.
3. Wirehouse retirement plans allow for little flexibility or customization, and family teams often find the rules restrictive. Often family teams will opt out of the firm’s sunset program and the retiring advisor will simply assign the book to the junior partner/heir apparent and establish a side financial agreement. In this arrangement, the book remains entirely portable since there are no strings attached to the firm.
4. Retiring advisor agreements contain language that ties the business to the firm, typically for 3 to 5 years following the retirement date. These retirement agreements trump the Broker Protocol, effectively binding the retired advisor’s business for several years and in effect eliminating options for the team until the agreement is up. Advisors who choose to leave the firm before the agreement has expired will face penalties.

If after careful consideration an advisor determines that leaving his legacy at the current firm is not the right solution, then moving prior to retirement will be necessary. If an advisor plans to work for at least 5 years post move, there is the opportunity to move to a wirehouse or regional firm, earn an aggressive transition deal and then retire under the new firm’s sunset program—effectively moving once and monetizing the business twice. Alternatively, for those advisors or teams with entrepreneurial DNA, moving to an independent model and selling the business upon retirement is a viable solution which yields attractive economics and the tax benefits of business ownership.

At the end of the day, there are many different ways an advisor can approach succession planning and multiple avenues that can ensure clients are protected, while the value of the business is maximized. The key however, is to start thinking about retirement planning well in advance of an intended retirement date and being strategic and thoughtful in considering all of the options, both inside and outside the current firm.