Practice Management July 3, 2023

The Business Benefit to Succession Planning

Planning for the future of a retirement plan or wealth advisory isn’t just about the years ahead—it can help drive success in the present.
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Art by Alfonso de Anda


Late last year, the Financial Regulatory Authority came out with a 31-page regulatory notice highlighting the importance of succession planning among financial advisories.

While the notice refers to the aging demographics in the industry, it starts with a section on the benefits of succession planning no matter how close an advisory is to a transition. 

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Philip Shaikun, vice president and associate general counsel at FINRA, says the organization emphasizes succession planning to protect both the industry and the end investors that advisers serve.

“There are a number of key benefits to succession planning,” Shaikun says, noting among them: minimizing operational risk, reducing regulatory risk, and keeping clients happy. “If firms have a good plan in place, that will inspire confidence in customers that the firm will maintain the same level of services, so from a competitive standpoint it benefits firms,” he says.

Succession planning can also mitigate legal and regulatory risk that could cost both time and money. This is especially true for smaller advisories as they “don’t always have additional staff that can step in,” Shaikun notes. 

FINRA does not want to imply that advisories are “in regulatory peril” for not having succession planning, Shaikun says, but advisories should be proactive to get the best outcomes for themselves and their clients.

Dressed for Success

Rob Madore, vice president at consulting firm MarshBerry Capital LLC, works with retirement and wealth advisories interested in selling. He says that for an acquirer to even consider such a transaction, the seller should have a plan in place for the future of their practice.

“A well-prepared business can tell the story about what makes them unique, why they’ve had such success, and back it up with readily available financials,” Madore says. “That is a firm that has the greatest optionality and leverage.”

Madore notes that, in what continues to be a strong acquisition environment, the price tags some owners may be dreaming of can be hard to land in reality, and particularly hard if you don’t have a longer-term plan for the firm.

“The elevated multiples that are so often floated in conversation really aren’t for those looking for an immediate exit from their firm,” Madore says. “Acquirers are looking to grow, and not just grow through the acquisition, but see the business grow organically after the acquisition – so they highly value a team who will stay with the business.”

Madore says acquirers are looking to bring advisers on that will be with the business at least three to five years, or more. When deals are structured, the acquiring firms tend to try and incentivize growth after-the-fact with strong earn-out components.

“In my experience, preparation and intentionality on the part of the seller have the greatest correlation with finding the best deal for you, your clients and your employees,” he says.

Joe DeNoyior, president of retirement and wealth management for aggregator Hub International, reiterates the importance of a strong team for advisories they are looking to acquire. An advisory with practice leads that are dedicated to the firm are preferred to Hub “helicoptering people in to take over the business,” he says.

“We don’t want to be somebody’s succession plan,” he says. “We don’t look to acquire firms by picking up margin and cutting head count—we want strong people.”

Even if an adviser is not looking to be acquired, it’s better to have their house in order for unexpected contingencies, according to FINRA’s Shaikun. He compares succession planning to estate planning—advisers may put it off because it doesn’t feel imminent, but if something unexpected happens, a contingency plan ensures a smooth transition.

“We tend to think about this kind of planning as not being discretionary,” he says. 

Next Gen

It’s not just independent firms that need to consider succession plans, however. Even large aggregators like Hub are starting to focus on the next generation of its advisers, according to DeNoiyer.

The aggregator is currently working on a program to cultivate the careers of its more junior team members, according to the retirement and wealth head. DeNoiyer says this work is in “early stages,” but that Hub’s insurance side already has good systems in place for his division to emulate.

“Where we are now in our in our cycle is being laser-focused on career pathing for these teams,” he says. “One of the reasons that we sold to Hub is, you know, is that I have a great team around me, but their career path was limited to where the adviser lead took the firm.”

No matter an advisory’s situation, however, Madore says the best positioned practices are those that don’t hold off on succession planning.

“The best time to start working on maturing the business, preparing for a financial event, or determining what options are available to your firm is when you don’t have to,” he says. “Time is the greatest killer of deals. The more work you do up front, the less chance of issues in the later stages [of a deal.]”

Products May 31, 2023

Retirement Income Today: How Advisers Can Leverage GLWBs

In-plan annuity products are proliferating, but if advisers want an option today, they should know about the guaranteed lifetime withdrawal benefit.
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Art by Alex Eben Meyer


According to recent research from American Century Investments, “73% of workers want an investment that protects against losses, and a majority would prefer to have their account balance’s ability to generate guaranteed income automatically protected.”

Findings like this have been spurring defined contribution plan sponsors’ interest in retirement income options, including the use of in-plan annuities. Such demand has also led to the growth of in-plan products, including target-date funds that default participants into fixed-income annuities.

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So far, however, adoption has been limited. PGIM Inc.’s survey of DC plan sponsors, DC Solutions: The Evolving Landscape April 2023, found that only 5% of plans currently offer in-plan annuities, but 34% are considering them. Meanwhile, only 14% of sponsors reported “a significant amount of participant interest in adding in-plan annuities.”

Retail annuity sales, however, continue to break records amid high interest rates and a rocky market ride in 2022. So how can an adviser recommend an in-plan annuity option today?

The guaranteed lifetime withdrawal benefit is, at the moment, the most popular option for plan sponsors, often via a managed account program, which have seen the biggest growth in 2023, according to Larry McQuaid, vice president and head of business development for SS&C Technologies’ retirement solutions division. GLWBs come in several varieties, according to McQuaid, such as target dates with insurance guarantees, or moderate risk funds with an allocation in guaranteed income.

In the future, McQuaid sees innovations such as TDFs with an annuity sleeve taking off “once plans become comfortable with making them plan default options.” But for now, the GLWB is the predominant use case to offer participants in-plan retirement income.

Contract (or account) value vs. income benefit base

Unlike traditional investments that have a single value in a participant’s account, plans with a GLWB calculate both a participant’s account value and a hypothetical income benefit base value. The benefit base is used solely for calculating withdrawals—this money cannot be rolled over to an IRA as a lump sum, for instance. While account values fluctuate with investment returns and can experience negative returns, the participant’s benefit base does not decline with market performance (although it can increase). Contributions to the account also increase the benefit base.

FIAs are linked, not invested

A fixed-indexed annuity’s account performance is linked to an investment index like the S&P 500, but the account funds are not invested directly in the index. Instead, the participant’s account value will track the index through a credited interest rate based on the index’s capital gains or losses. Dividends are not included in the return calculation, and a fixed-rate option is usually available as well.

Formulas for crediting index-linked interest vary, but a typical arrangement uses three scenarios. First, if the index has a loss for the calculated period—one year, for instance—the credited interest rate for the next period will drop to zero (the rate “floor”), but the income base value will not decline.

Second, if the index’s price return is between 0 and 10%, the credited interest rate for the next year will match that gain, although some FIAs use a participation rate that limits increases to a percentage of the linked index’s gain.

Finally, the tradeoff for the downside protection is a cap on the upside return. Should the tracked index generate a return of, say, 20%, the benefit base might be limited to a 10% maximum credited interest rate for the next period. The range of floors and caps varies among FIAs, but the use of a predetermined returns’ spread is standard.

Rolls-ups, step-ups can increase the benefit base

The benefit base can increase over time from “roll-up” and “step-up” provisions, in addition to investment returns and contributions. A roll-up feature provides an automatic percentage increase in the benefit base during the accumulation period. For example, the Allianz Lifetime Income+ plan offers a 2% annual additional return on a plan’s benefit base, even if the credited interest rate for the period is zero.

Wade Pfau, the Dallas-based co-founder of RISA LLC and the author of “Retirement Planning Guidebook,” notes that automatic increases to the benefit base are not the same as investment returns.

“Sometimes people say, ‘I’m getting a 6% guaranteed return on my annuity,’” Pfau explains. “What they really mean is: ‘My benefit base is growing at 6% a year,’ which is not a number you have access to. It’s just a hypothetical number used to calculate the subsequent guaranteed income amount.”

If the plan’s investments have performed well and its account value on the evaluation date exceeds the benefit base, the benefit base is reset—stepped up—and locked in at the higher account value, known as the “high water mark,” which in turn will increase the guaranteed income distribution. A benefit base increase is generally the higher of the roll-up or the step-up amount.

Withdrawal amount calculations

A participant’s guaranteed income is usually determined by the benefit base value and the participant’s age at the time of the first withdrawal. For instance, the guaranteed annual withdrawal rate at age 65 could be 5%, escalating to 6.5% for withdrawals starting at age 80. Provided the participant does not withdraw more than the guaranteed amount, under most GLWB options, the initial withdrawal rate will hold for life, even if the account value goes to zero. Some plans have variations on the withdrawal rate in that scenario, though. Nationwide’s NCIT American Funds Lifetime Income Builder Target Date Series provides a 6% withdrawal rate against the income base that drops to 4.5% if the account value reaches zero.

Excess withdrawals

The guaranteed withdrawals reduce the account value, but that does not change the participant’s withdrawal amount, which is calculated using the income base. Also, withdrawals with a GLWB provision do not require participants to annuitize their account balances. GLWBs provide additional liquidity above the regular withdrawal amount by allowing participants to take excess withdrawals from their account balance. These excess withdrawals reduce the account value and the benefit base and consequently reduce future guaranteed withdrawal amounts. Some insurers adjust the benefit base using a dollar-for-dollar method; others use a proportional method.

Cost of GLWB features

The lifetime income guarantee poses a risk to insurers who must continue making payments, even if the participant’s account value cannot support the withdrawal amount. According to the Institutional Retirement Income Council, the average annual cost charged against participants’ accounts to insure against that risk averages about 80 basis points. These fees generally start when the participant begins to allocate funds to the GLWB option, or within 10 years of the target date in a TDF structure.

One point to keep in mind is that withdrawals up to the account value are a return of the participant’s own funds, even though the product issuer is charging the insurance fee during those withdrawals. According to Spencer Look, associate director of retirement studies at the Morningstar Center for Retirement & Policy Studies, the firm’s research found that in “the vast majority of our simulations, the plan participants ended up just withdrawing their own money until their projected death. The value of the insurance only came through in the rare cases where the plan participant lived a very long time and experienced very poor market returns.”

Death Benefit

Currently, the standard arrangement is that a participant’s beneficiary receives any remaining account balance, but that could change. Morningstar’s “The Retirement Plan Lifetime Income Strategies Assessment” report noted that death benefit riders that can provide a larger benefit than the remaining account balance are common in out-of-plan variable annuities and could be offered in plans in the future if there is demand.

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