Journal of Financial Planning: May 2019
David M. Cordell, Ph.D., CFA, CFP®, CLU®, is director of finance programs at the University of Texas at Dallas.
Jared Pickens, EdD., CFP®, AFC®, is an assistant professor of finance and the director of personal financial planning at Texas A&M University—Commerce. He teaches introduction to financial planning, retirement planning, and financial planning capstone at the undergraduate and graduate levels.
For most individuals approaching retirement, their critical concern is whether they have saved enough money to live out their golden years in comfort. Financial planners also approach retirement, and they have the same concern about their own financial well-being in retirement. They are also concerned about their business succession plan.
The most important aspect of a financial planner’s own business succession plan should be how to transfer the responsibility for their clients’ financial future to other financial planners who will best fit their clients’ respective needs, wants, and personality. There is no one-size-fits-all system or universal process of how exactly to accomplish that goal.
Financial planning firms transfer clients in various ways. Some split the client list evenly among the other current advisers. Some hire a new adviser. Still others use a combination of both. Fiduciary responsibility, however, demands that substantially more thought and analysis be put into the decision-making process to achieve an optimal outcome. While this column focuses on firms with multiple advisers, we believe it will be just as useful for sole practitioners nearing retirement.
The Financial Planning Orphanage
According to the Bureau of Labor Statistics’ 2018 Occupational Outlook Handbook, there are approximately 270,000 financial advisers in the United States.1 The Certified Financial Planner Board of Standards currently certifies more than 83,000 professionals.2 Although an increasing number of people are entering the financial planning profession, CFP Board data also shows that about five out of every 10 CFP® practitioners are between the ages of 50 and 80. Tens of thousands of the profession’s seasoned veterans and pioneers are already being sized for a gold watch and are halfway out the door.
Those planners preparing to hang up their spreadsheets in the near future may already have begun the process of: (1) informing their clients that a successor planner is necessary; and (2) easing them through the transition. A changing of the guard with any trusted professional brings anxiety—whether it’s a long-time personal physician, dentist, or financial planner—so the discussion between the planner and his or her clients can be challenging.
Proper planning along with an in-depth review of each client will increase the likelihood that clients will stay with the firm and have as positive an experience with their new planner as possible. We suggest beginning the transition at least one year ahead of the planner’s expected retirement to give all parties adequate time for a smooth handoff.
Client Transition Review
Ensuring a smooth transition from one planner to another requires attention to detail and inclusion of the client as an active participant. Each client has their own tastes and preferences related to their planner. Prior to recommending a new planner, it is critical to identify why the client hired their current planner, why they remained a client over the years, and whether those conditions are still relevant.
The transition should occur over a series of meetings, the first of which will inform the client that the planner is approaching retirement and that the firm wants to help the client identify the best possible successor. Subsequent meetings should help identify what is and what is not so important to the client when choosing the next planner.
We acknowledge there is no perfect system in pairing a client with a new planner, but one can improve the odds of a successful transition by considering the following variables:
Communication Expectations and Time Requirements
No two clients are the same. This truism is especially apropos for the level of attention a client will demand/expect from the planner. Some clients want to be in constant communication and expect weekly phone calls during normal markets. During turbulent markets they may want more frequent phone calls and even special meetings. Other clients are delegators whose expectations require only sporadic contact.
A 2018 study published in the Journal of Financial Services Marketing3 found that Gen-X and Gen-Y clients tend to be more involved with their planners than baby boomers and older generations, and they typically require more communication. A client who has come to expect a great deal of communication should be assigned to a planner who has adequate time and both the comfort level and patience to handle this requirement.
Specialization and Occupation Experience
Just as no two clients are alike, no two planners are alike. Most planners have a planning strength, or even a specialty, which may or may not be specifically related to their clients’ occupations. For example, a physician will typically have some specific planning needs that a tech executive may not have. Physicians may be more concerned with business planning for their own practices, risk management related to malpractice, and other considerations. The tech executive might need an expert in deferred compensation, including items like restricted stock and incentive stock option planning. When evaluating a transition, clients are typically better suited to a planner with substantial experience working with the client’s specific occupation.
Complexity of the Client
While some client situations are straightforward, most are not. Each client is unique with unique circumstances, meaning the expertise required from a planner will include everything from complex estate planning strategies, to tax planning for numerous tax entities, to employee benefit and retirement plan selection and monitoring. The best interest of the client is to work with a planner who has substantial experience with issues of similar complexity. A flatter learning curve regarding relevant rules and regulations allows a faster understanding of the new client’s situation and more time to nurture the new relationship.
In some cases, the client’s situation becomes increasingly complex over time to a degree that the retiring planner really ceased being a good fit, but the relationship was maintained due to loyalty. In such cases, the recommendation of a new planner should be based particularly on the planner characteristics that are needed rather than those possessed by the retiring planner.
Keeping Networks Together
Financial planners acquire clients through marketing and advertising, but referrals—often from family members and close friends—are probably the most important avenues to acquiring new clients. These groups of connected clients may prefer to have the same planner. Parents and their adult children, for example, may want to have the same planner to help coordinate and communicate education planning and wealth transfter strategies. Keeping these connected referrals together may also provide a sense of togetherness for the clients with their new planner.
A particular challenge exists with adult children. Often, the adult child will see the retirement of the planner as an opportunity to change to a planner who is more suited to the adult child’s profile, or maybe to change to a planner who is simply a friend or acquaintance. Recognizing this issue, and perhaps helping the adult child to select a planner who meets their own maturing situation, can help to retain business and, more important, serve the younger client better.
Planning and Investment Philosophy
Financial planning is not a static profession. New research and technology help planners implement innovative strategies and upgrade recommendations, but each planner has their own style and perspective. While some recommendations may be common throughout the profession, there is also divergent thought about the best financial strategies to follow.
Imagine a client who has been advised for years that the strategy for success requires passive investing, a traditional will, a 4 percent sustainable withdrawal rate, and nondeductible contributions to an IRA. It would be unsettling—and likely upsetting—if the new planner informed the client that those are not the planner’s preferred practices. Such an about-face could leave the client feeling vulnerable and betrayed by the previous planner, distrustful of the new planner, or both. It is important to make sure that a client is transferred to a planner who will not change past recommendations drastically just because they are not consistent with their own financial philosophies. Doing so can jeopardize the relationship and potentially cause the firm to lose the client.
Age, Gender, Race, and Religion
If employers specify requirements regarding the ethnicity, race, gender, sexual preference, religion, or certain other characteristics, they are treading in extremely troubled waters with serious legal and ethical ramifications. Nonetheless, people are people, and it’s a fact of doing business that certain clients may have a preference when it comes to the age, gender, race, and religion of their planner. The same may hold true in reverse. A planner may prefer to work with clients of a certain age or educational background.
With regard to age, research shows that pairing a client with a planner of a similar age has benefits, not from the age itself but from the shared experiences that come with living a certain number of years. This commonality can create a feeling of connectedness.
For example, although a baby boomer client can have a successful relationship with a Gen-Y planner, it still might be difficult for them to connect in certain areas. A baby boomer experienced Black Monday (October 19, 1987), when stock markets around the world crashed and the Dow Jones Industrial Average fell more than 22 percent. While younger planners will be familiar with the event, they didn’t live through it, and they can’t connect with a client on that experiential level. Further, a client may be distrusting of a planner who never experienced such a drastic drop, or who is so young that short-term losses are of minimal consequence in their own retirement portfolio.
When it comes to gender and race, research is less clear. A recent study published in this Journal4 found that clients have no gender preference for a planner, but that they look favorably on adviser firms that include both men and women. Racial diversity may be viewed similarly. While gender and race may not be critical when assigning clients to a planner, it is important to understand that individuals of different gender and/or race may not look for the same characteristics in the relationship. It is quite possible, for example, that a client may feel much more comfortable with a planner of the same gender or race because they believe that is necessary to fully understand their situation and their feelings. CFP Board’s effort to increase the number of women and minority planners seems to be a recognition of that fact. That said, attempts to match clients and planners according to gender and race are fraught with legal perils and claims of discrimination, regardless of the intent.
There is little research on whether religion plays an integral role in the selection or retention of a financial planner. Typically, religion is not a big factor in the financial planning process. Still, if a client has had discussions about their faith with the retiring planner or made financial decisions guided by their religious beliefs, then it would be prudent to consider those facts when selecting the new planner.
One characteristic that seems to be increasingly important in today’s contentious society is one’s political beliefs. Although most clients won’t care about the political beliefs of the planner, many will care very much. At the very least, one should take care to recommend a planner who is not inclined to express political thoughts that may be antithetical to the client’s.
Final Thoughts
Financial planners work very hard over the course of their professional careers to care for their clients and help them achieve their financial goals. Eventually, planners retire, and transitioning a client to a new planner must be carefully evaluated. Rather than handing a book of business to one planner or dividing clients randomly among existing planners at the firm, each client should be carefully evaluated and interviewed to identify the best fit between client and new planner, a process that should yield both a higher retention rate for the firm and a better outcome for the client.
Endnotes
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See the Occupational Outlook Handbook from the Bureau of Labor Statistics at www.bls.gov/ooh/business-and-financial/personal-financial-advisors.htm.
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See CFP Board’s CFP Professional Demographics at cfp.net/news-events/research-facts-figures/cfp-professional-demographics.
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See “Generational Differences in Perceptions of Financial Planners,” by Raminder Luther, Linda Jane Coleman, Mayuresh Kelkar, and Gregory Foudray. Available at link.springer.com/journal/41264/23/2/page/1.
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See “Gender Bias and Practice Profiles in the Selection of a Financial Adviser,” by Matthew Sommer, Han Na Lim, and Maurice MacDonald in the October 2018 Journal of Financial Planning.