Succession planning is a hot topic in the financial planning world. Not only for our clients but also for wealth management firms. It seems the only option owners of wealth management firms see for leaving their business is to sell to business to your key people or to an outside party.
I want you to think about another strategy. I call it the wind down and for most wealth managers it’s the one that makes the most sense. Here’s how it works.
Decide who your best 20% of your clients are.
The first step you need to take is look at your book of clients. Who are your best 20%. This doesn’t necessarily have to be your largest clients but it likely will.
After you put the list together add up how much of your firm’s revenue these clients represent. If you’re like most firms, it would like be 80% or more of your revenue.
If you service 100 clients that produce $750,000 per year in revenue your wind down clients will probably produce about $600,000 per year in annual revenue. Think about this for a second. 80% or more of your revenue probably come from a very small group of clients. What would it be like for you to only have your best and most profitable clients to take care of?
Put together a profoma statement of what your firm would look like.
You’re probably going to have a hard time figuring out what to do next. I recommend you look at your firm and see what type of expenses you would have if you only had twenty clients to service. I bet you would cut a huge chunk of costs out of your life.
Instead of trying to take care of 100 clients you now have 20 and you’re likely going to make more money than you did with 100. You no longer have to work sixty-hour work weeks. Now you can work 10 or 15 hours. You can take weeks of vacation at a time. Having a smaller practice allows you to do other things while keeping the lions share of the income from your former practice.
Compare this to selling.
Let’s say you find working ten or fifteen hours a week attractive. If you could figure out how to do this you wouldn’t want to sell your business. Instead of receiving a down payment of $600,000 from a sale and then having to finance $900,000 for a $1,500,000 transaction you’ll make $400,000 or more for as long as you want to keep working just a few hours a week.
Let’s think about this for another second. You can get $600,000 in cash and then hopefully the rest over 7 or eight years with lots of risk. Or, you can get $400,000 per year for as long as you want with almost no risk. Isn’t getting $400,000 per year working ten or fifteen hours a week an attractive idea?
Find a new home for the 80%.
I know what you’re thinking. What am I going to do with the 80% who have relied on me for advice for years? Some of them started with me when I first got in the business. I can’t just stop servicing them.
The answer is you’re not. What you are going to do is find a good home for them. You’re going to find a young planner that you can transfer these clients to. You’re going to take time and find the right advisor who will value the clients you’re going to move. And you’re still going to be around the business to back stop those clients if there’s a problem.
Here’s the hard part. I don’t want you to think about selling these clients. I want you to think about just finding them a good home. I want you to take just a little bit of money for your clients. You need to focus on finding them a good home and that’s it.
Over time reduce the 20%.
If you adopt this strategy you’re likely to continue way past normal retirement age. When you reach 70 you might want to work even less. You do the same thing. Take a few clients and find a good home for them. Eventually you’ll get to the point where you have five clients. You might want to just call it quits at that time or find a firm that allows you to use their infrastructure to just service those clients and if and when you retire those clients would transfer to the firm you’re hanging a shingle with.
Let’s say you only use this strategy for ten years. Let’s assume you’re sixty when you start. Instead of selling your business and hopefully getting $1,500,000 over seven years, you’re going to get $4,000,000 over ten years while you’re only working part time.
If you don’t have an ensemble firm, this is a strategy I hope you consider. I would even be willing to spend some free time working out how this would work in your firm. Give me a call and let’s talk. I bet it’ll be worth your while.