Financial services firms slowly started implementing succession plans (or sunset agreements) about a decade ago. It started with the wirehouses, but soon spread to regional and even smaller firms.
However, most banks still have not come around to the idea. It seems like an obvious and easy benefit to offer, but most banks have been slow to wake up to these benefits.
For many years, bank advisors simply retired and left their books behind. Other advisors would inherit the clients and become the beneficiaries. Knowing there were no succession plans offered by their employers, some bank advisors would make their own by changing firms late in their career and then slowly reducing the hours they spent in the office. This is still the plan used by some advisors who work at firms with no succession plan.
But that's a long slog that can easily be avoided. Indeed, having a succession plan in place is not only important for the advisors, but also for their clients and institutions. Most advisors build strong relationships with their clients. They get to know their families, hobbies, interests and personal situations. There is a bond and trust built over the years. The advisors and most of the clients cherish this relationship. Neither one wants to lose the other, but sooner or later everyone will decide to cut back or stop working all together.
Banks like to believe they own the clients, but what exactly does it mean to "own" a relationship? Clients are free to choose whom they do business with. And if there is a strong relationship between advisor and client, the client is often the one seeking to continue the arrangement.
To be sure, there are non-solicits and they are often held up by the courts. However, if a dispute occurs, the institution must prove the advisor is soliciting the clients. This can be difficult to prove. Moreover, with clients and advisors connecting on social media, non-solicits become even more difficult to enforce.
Here at the Rummage Group, we see this situation a lot: an advisor and a bank fighting over the same client. Sometimes the advisor wins, sometimes the bank wins. It depends on who built a stronger relationship with the clients.
This difference of viewpoint comes to a head when a bank advisor decides to retire. He or she may think they have a strong relationship with their clients, but the bank thinks the same thing. So the advisor often feels as if the bank's viewpoint is this: “Thanks for bringing us a revenue stream, now leave and be thankful we even gave you a job.”
So there are some advisors who just retire without any ongoing benefits from what they built. Smart advisors see things differently, obviously. They try to find a way to have some monetary compensation from this ongoing revenue stream. If it means leaving the bank and taking the clients, they will. They will reap the rewards at another firm or even model.
This situation is not good for the bank. If the advisor goes independent, he can take the clients with her and benefit the most. Again, non-solicits can be hard to enforce.
The smarter banks have wised up to this process and finally started offering succession plans. There are many ways to construct such an agreement. But essentially, the company and retiring advisor work together to select another advisor who will inherit the book (and if the retiring advisor has a say in selecting the inheriting advisor, it’s usually more successful). They set up an arrangement where they will share revenue for a few years where the split favors the retiring advisor in the first couple of years and then shifts to favor the inheriting advisor in the last couple.
The combinations and revenue splits can vary. Every institution is unique and therefor the agreement must be customized. The important thing is that all parties must be satisfied: The advisor gets to share the revenue from the book they built over many years and the bank does not have to worry about losing so many clients to retiring advisors.
The unfortunate truth is that only a small percentage of banks have a succession plan in place. Again, many banks act stubbornly because they believe they own the clients. As long as they have this attitude, advisors will find ways to obtain income from their books in retirement. They worked too hard to just turn it over with no benefits.
Banks should think of it this way: With a succession plan, they are the big winners. They are actually keeping the revenue stream, but just splitting it differently (for a few years) with two advisors instead of one. And if offered, most advisors would take this plan instead of leaving. If the banks don’t wise up, the advisors will.
Rick Rummage is the founder of the Rummage Group, a career consulting firm for financial advisors.