Preparing for when the unexpected occurs

John has just come home from the doctor. The diagnosis? The big C. A thousand thoughts race through John’s mind. He bought life insurance a decade ago, so he knows his wife will be OK. But does John need to review the beneficiary designation?

He and his wife still own the first house they bought. But how exactly is it titled, and will it transfer easily?

And what about John’s practice?

As an independent financial adviser, John has 200 households that depend on him for financial guidance.

John had read about succession planning in the trade journals. But at 51, he didn’t think he would need to address the issue for quite some time.

John had casually investigated the possibility of taking on a junior adviser, seeking someone just like himself. Not surprisingly, John never found anyone who fit the bill.

With all the challenges ahead, one would think that he would be in action mode, preparing for the worst-case scenario. Instead, John does what many advisers do when it is time to consider transitioning their practices: avoid the situation.

After all, he reasons, his doctor caught the cancer early. With all the new therapies available, John may not need to worry about his firm’s future just yet.

Despite the troubling diagnosis, he continues working as a solo practitioner and sees little change in his productivity, at least at first.

Gradually, John’s condition begins to take a toll. He starts becoming forgetful.

Then John’s health takes a sharp turn for the worse.

Meanwhile, news spreads among his clients that he is seriously ill.

Naturally, they have questions: Why didn’t John tell us? What happens next? Who will make decisions regarding the practice? Should I move my money?

PROCRASTINATION COMMON

Unfortunately, John’s story isn’t unique. When it comes to succession planning, it is well-known that advisers tend to procrastinate.

Even when the end seems nigh, advisers are often slow to take action. But if you haven’t made arrangements for the fate of your practice, who will?

Ensemble firms have an easier time handling extreme situations such as John’s. But for the solo practitioner, a sudden illness can make or break the practice.

In these cases, power of attorney may help keep the business afloat. The holder of the power of attorney — often a spouse, broker-dealer or friend in the industry — can make business decisions on the adviser’s behalf if he or she becomes incapacitated.

In this heavily regulated industry, privacy issues are likely to arise if the person with power of attorney isn’t registered with the Financial Industry Regulatory Authority Inc.

Such a person — even a knowledgeable spouse — may have difficulty accessing critical information that affects the sale of the business. An adviser at the firm who holds Finra-registered power of attorney won’t face these challenges.

Advisers affiliated with a broker-dealer may wish to designate power of attorney to another adviser with the same broker-dealer, giving him or her the right of first refusal to purchase the business. If no arrangements are made, the broker-dealer may simply reassign the clients to another adviser.

Some advisers create an informal agreement with another adviser. Essentially, the other adviser promises to step in if needed to help the surviving spouse sell the practice.

Although not a legal document, the agreement gives a nonlicensed spouse a shoulder to lean on. Typically, the other adviser has the right of first refusal to buy the firm.

An attorney should draft a formal power of attorney to include authority for everything necessary to sell the business. Once an adviser dies, decisions about the practice fall to his or her estate, and any transition-related activities will likely take longer to execute.

At this time, even loyal clients may look elsewhere for guidance, particularly if a solid transition plan hasn’t been put in place.

If an adviser dies without a signed buy-sell agreement, it is tantamount to offering the practice at a fire sale price. Making a plan to help your loved ones decide what to do with the business, including assigning power of attorney, is certainly an option.

But a better approach is to draft the buy-sell agreement in advance and avoid the situation altogether.

Disaster can strike anyone, regardless of age. For solo practitioners especially, it is never too early to consider creating a succession plan.

Joni Youngwirth (jyoungwirth @commonwealth.com) is the managing principal of practice management at Commonwealth Financial Network.

Related Topics: ING Group, Practice Management