The “Secret Sauce” for Advisor Succession
Retired Advisor Christine Timms shares her insights on the “secret sauce” of portfolio construction relating to succession planning and discusses strategies that will help ensure a successful transition—no matter which side of the transaction you’re on.
Retiring or Acquiring – A Smooth Transition is Key
Succession is a milestone for any Advisor. If you’re retiring, it’s your last act on behalf of clients that you may have known for years—an opportunity to leave them in good hands and set them up for future success. If you are acquiring a retiring Advisor’s book, it’s an opportunity for growth and to earn the trust of new clientele.
In my career, I had the opportunity to be on both sides of the transaction, and in each case, the experience taught me some valuable lessons.
I retired in 2016 after a 33-year career as an Investment Advisor. My book was taken over by two associates from my team, with whom I’d worked for some time and who had strong existing relationships with my clients. This familiarity proved to be a major advantage resulting in a strong retention rate to this day. My departure was a couple of years in the planning—I was aiming to retire at 60, and definite preparations began when I was 58. My clients were well-prepared for the transition, as I’d been half-jokingly telling them for years that if I was ever hit by a bus, my associates would be stepping in.
My experience acquiring a retiring Advisor’s book was not quite as ideal. I was 42 at the time—18 years away from retirement. A colleague fell ill, and he couldn’t return to work. As a result, there was little time for a proper transition—the doctor’s orders were that he could call his clients, give them my name, and let them know I’d be getting in touch. That was it. I had no opportunity to analyze, plan, or discuss anything with the Advisor. I was told that the Advisor chose me because he trusted me to do what I thought was best for his clients. Our firm decided on the sale price, and while I’m sure the Advisor felt underpaid, I was taking a big risk. To this day I am grateful and flattered that he chose me. However, he was a stock picker—and while I was also a stock picker at the time, my investment strategy was based on very different criteria and included mutual funds. Due to the lack of overlapping service, the different approaches to investing, and the inability to explain these differences to the clients together, there was a much higher turnover in clientele than my successors experienced when I retired. Stock pickers usually have unique criteria that their clients have accepted as their secret sauce and this uniqueness inspires clients to stay with them. However, most clients did like my approach, and ultimately, we gathered more assets from the clients who stayed.
Making a Move to Managed Money
The most important element when preparing for succession is compatibility. No two Advisors’ business models will ever be a 100% match, but the trick is to be fully aware of the differences. Key factors that should be considered include:
- Personal compatibility—Advisor and successor like and trust each other
- Overall approach to investing—risk level, types of securities
- Communication style and frequency
- Fee structure—transactional vs. fee-based
A particularly crucial consideration is managed money vs. stock picking. Although fewer and fewer of today’s Financial Advisors fit the old “stockbroker” model, the unique talent of picking individual stocks—call it an Advisor’s “secret sauce”— is still highly valued by certain clients. But that value is hard to monetize in a client transitioning transaction. In reality, stock pickers are likely to receive less compensation for their book, even if their successor is also a stock picker. This is largely because clients’ perception is (and in most cases, rightly so) that the skill is so unique to the individual that it is difficult to pass down to the successor. From the successor’s point of view, retaining clientele will also be more difficult unless the successor comes from the retiring Advisor’s team.
A good solution to these compatibility issues is the use of 3rd party money management. In the latter years of my career, I joined an increasing industry trend in gradually shifting from stock-picking to a more holistic financial planning model with managed money. With that approach, you still construct unique customizable portfolios, but your clients also benefit from multiple managers’ expertise and greater portfolio diversification, and there is lower risk for both the client and the Advisor. And unlike individual stock selection, it’s a methodology that can be easily handed down to a successor, making client retention much easier and upping your business’ value.
For fee-based managed solutions to streamline your practice, see the bottom of the page.
More Tips to Make Sure You’re Transition-Ready
Whether acquiring a book or getting ready for retirement, these simple guidelines will help ensure a smooth succession process:
3 Tips for Retiring Advisors
- Deliver the News to Your Clients Early and Directly – It’s important that your clients hear the news straight from you. Be sure to have your ducks in a row—a successor prepared to articulate their business model, team member plans, and expected dates for the hand-over. Mentioning the successor as early as possible in the conversation can also help avoid unnecessary worry on the client’s part.
- Choose the Right Time to Retire – I’ve written extensively about the dangers of retiring too late—an increased chance of a personal or family health crisis that could affect your business; reduced capabilities that could lead to errors; potential difficulty keeping up with technology and industry changes. But there are also dangers to retiring too early. Suddenly being without responsibilities after a potentially decades-long career can be psychologically and financially painful. My suggestion is to ease into retirement by gradually taking more time off. For instance, start by taking Fridays off and go from there. That way, your “new normal” won’t be as big of a shock to you, your team, or your family.
- Have a Plan for Your Retirement – Before you call it quits, it’s important to know what you’ll be doing with your newly-found free time. While playing golf every day sounds like fun, it’s perhaps not all it’s cracked up to be if you’re used to a busy, productive lifestyle. Pursuing lifelong goals—without having to worry about profitability—is wonderful. Personally, I’d always wanted to write two books: one featuring advice for Advisors and another geared towards helping individuals seek, understand and benefit from independent financial advice; I’ve accomplished the former and am working on the latter. But before taking the leap, make sure you have a solid financial plan with multiple scenarios, like what you’ll do if the market tumbles 30% in your first year of retirement. That way you will be better prepared for whatever life throws at you.
3 Tips for Acquiring Advisors
- Get to Know the Retiring Advisor – To maximize your chance of being selected as a successor, you need to learn about the retiree—how their business operates, what their investment philosophy is, and what they’re like on a personal level. Find out what they think will be the best business model going forward—it might be different from what they are doing now. Yes, understanding the dollars and cents of their practice is a crucial part of the succession. But just like with clients, a personality match is more important than you might think. Envision it this way—if your clients like and trust you, they’ll probably like and trust somebody you like and trust.
- Learn to Articulate Your Business Model – To successfully woo a retiring Advisor, you need to be able to explain the services you offer so that they have a clear picture of what their clients will be getting. There are many components to a business model—in fact, I offer a bundle of checklists to help Advisors identify them. But for starters, ensure you have answers to questions about your fee structure, communication style, and approach to investing.
- Make Succession a True Partnership – A transition is like a last will and testament—an Advisor’s final gift to their clients, with each side holding a moral and ethical responsibility to make sure everything goes as smoothly as possible. Sometimes, an Advisor will find their successor within their team, as I did. But the successor can also hire the retiree. In either case, there should be a period of overlapping service where the client knows the outgoing Advisor is still there for them while they adjust to the successor. When the successor is not part of the retiring Advisor’s team, I’d recommend at least half a year overlap—ideally a full year—being sure to cover high-service periods around tax-loss selling, tax return preparation, and RRSP contributions.
Christine Timms is the author of three handbooks for Professional Financial Advisors, including “Transitioning Clients and the Retirement Exit Decision” (available in paperback, e-book and audiobook). Her website, christinetimms.com, provides descriptions and testimonials, as well as written and audio versions of the introductions of each book and tutorial videos. Christine can be contacted through her website or via LinkedIn.
To discuss these or other investment solutions that leverage the expertise of BMO’s team of money managers, contact your BMO Global Asset Management Regional Sales Representative.
BMO Global Asset Management Disclosures:
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax, compliance or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
* As compared to an investment that generates an equivalent amount of interest income.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.