The Five-Year Myth Among Financial Advisors

As with any industry, there are many myths that can falsely influence an advisor’s decision about their career and their practice. We’ve talked before about the myths around practice value that can negatively impact an advisor’s equity. There’s another myth that is as equally pervasive, and equally detrimental to an advisor’s retirement. We call it “The Five-Year Myth.”

Poll any advisor over the age of sixty about when they plan to retire, and you will likely hear, “in about five years.” Five years is a comfortable number for advisors. Its far enough away to not create any pressure, giving advisors the sense that they have plenty of time to plan for their retirement and to squeeze out the most income from their practice before they sell. It’s also not too far in the future, giving advisors the sense that it is a realistic number and that they are consciously thinking about the next phase of their career. That five-year mark becomes a moving target as advisors age and continue to hold on to this idea of a distant, but not too distant, retirement date five years down the road.

Another factor influencing this five-year date is the belief that income earned is better than equity. Advisors are unwittingly choosing short term gains that create long term losses. This is because they falsely assume that practice equity will hold steady. The truth is that without constant growth, practice value will decline, not plateau. Many advisors who have already adopted the “five years to retirement” mentality are surprised to find that their practice value will start to decline in 1-2 years. That is if it hasn’t already started to decline. This is especially true if the advisor’s client base is heavily skewed to clients over 65 years of age. As they too near retirement and draw down assets, the value of the practice rapidly declines, negatively impacting the advisor’s hard-earned equity.

Yet another large and often not talked about factor influencing this “five years to retirement” mentality is the fact that advisors have failed to define what “retirement” looks like for them. They haven’t taken the time to think about what the next phase of life holds for them. They haven’t defined what they are moving toward. That’s because, although advisors spend their time educating clients to the contrary, they falsely equate selling their practice and retiring from being a practice owner with quitting all productive endeavors and living a life as a silver surfer at the retirement center.

Retiring as a practicing advisor does not mean that the advisor is stepping one foot in the grave. It means they are cashing in on their hard-earned equity and stepping into a new and fulfilling role. That could mean consulting to the industry and helping cultivate new advisors coming up the ranks. It could mean volunteering in the community, a second career in another field, or any number of things. Bottom line, life doesn’t end at retirement. Instead, it signifies the beginning of a new opportunity.

Advisors who are realistic about the trajectory of their practice equity and actively plan for their own retirement will be able to cash out with more of that equity in their pocket so they can finance and enjoy that next phase of life. Adopting a “five years to retirement” mentality is detrimental to the advisor’s financial future. Securing a practice valuation and consulting with a Succession Expert is the first step toward taking control of your advisor retirement and purposefully planning your advisor legacy.