Most bank advisers have to carve out their own retirement plan
Bob is a 65-year-old adviser at Random American Bank. He has worked hard to build a $150 million book throwing off $1.5 million in revenue. Over the last 37 years, he has seen a lot of economic ups and downs. There have been good times, and some bad ones too. In fact, a few times he thought he would have to exit the business.
Bob knows, all too well, that being a financial adviser is not for the faint of heart. There are risks that his salaried banker friends just don't share. First, it means working on 100% commission. Secondly, you are an employee at will (usually) and can be fired at any time for just about any reason. Third, you have a tremendous amount of compliance and potential litigation risk. An adviser can also lose his or her licenses at any time for various reasons. In times of trouble, most banks will be happy to let the adviser take the fall to save themselves. Banks sometimes settle bogus legal cases in order not to risk a potential large financial loss. This sometimes means the adviser gets barred from the industry, or at the least fired and severely scared on their public FINRA record. Finally, there are economic and market risks.
So, with all these risks associated with building a book, what is the reward for Bob at retirement? Nothing. After painstakingly building a million-dollar book, Bob just hands it over and the bank gives it to another adviser. The vast majority of banks don’t even have a sunset agreement. They certainly won’t give an adviser two to three times revenue when they retire. Why is this the case? It’s simple: The banks feel they own the clients and the advisers' success is solely because of them.
This being the case, what can Bob do to reap some of the rewards? What if Bob still wants to work, but on a part-time basis? What if Bob would like to reduce his hours significantly and still have $100,000 to $200,000 in income for the next 10 to 20 years. The only real option is to not retire, but leave. He can go to an RIA, a hybrid or to a high-payout firm with book ownership and flexibility.
Here at my firm, the Rummage Group, we consult with advisers every day who are in Bob's situation. They usually tell us they are going to retire in two to five years. When we ask them about their books, they just don’t know any other options but to hand the book back to the bank.
Banks may not have sunset agreements and they certainly will not buy books back, but this does not mean advisers don’t have semi-retirement options. As long as advisers work hard to build strong relationships with their clients, they have options. Most clients are loyal to their advisers, considering the advice is honest and financially sound, and there is a good relationship.
When given a choice, most advisers would rather slowly reduce the hours they work in retirement, rather than just stopping cold turkey. Below are a few examples of what an adviser can do to benefit from what they have built.
● Go Light. Go independent and work from home. Many independent firms will let an adviser work from a home office. Transition over your best clients and keep the assets in fee-based products. This will reduce the work load with each client and therefore a sales assistant is not necessary. Your book will be lean and efficient and take just 10 to 20 hours each week, with no one to manage. If done correctly, you will have a high-income stream for many years to come without having to work a lot.
● Go Big. Go independent with the idea of really retiring in in five to 10 years. Find a nice office, hire an assistant and spend the next several years building as much revenue as possible. Hire a smart CFP adviser as a junior partner. Increase the partners' share in the practice every year until they eventually own the whole thing – maybe when you turn 80. There are many ways to structure this kind of arrangement. At The Rummage Group, we have helped structure these dozens of ways.
● Build to Sell. Transition as much of your book as possible to an independent firm and spend the next few years growing. Most books of fee based business are worth two to three times revenue. You will have dozens of large offers from other independent advisers the day you decide to sell. We get many calls each week from advisers looking to buy books.
● Keep it Simple. Some advisers stress about going out on their own. For these advisers, there are many options in every market. With all the boutique firms, plug and plays and RIAs that exist, the options can seem endless. A typical arrangement is for an adviser to own their books, receive payouts of 50% to 60% with no reductions or haircuts, work whatever hours you want. And if you decide to sell your book one day, they will buy it from you.
These are just a few examples of what’s available to advisers – whether retiring from a bank or some other model firm. I have used broad brushstrokes to explain, but each example can get detailed and customized. The key thing for a bank adviser to understand is options exist. You don’t have to just turn in the keys and let the bank keep all the benefits of the vehicle you have built.