How to fight the inertia of succession planning

One of the best ways for financial advisers to fight the natural inertia of succession planning is to seek outside help. Whether guided by a broker-dealer, a roll-up firm or an independent consultant, advisers should look for certain key features in succession-planning programs. These programs walk advisers through every aspect of a business transition, and the best ones facilitate a smooth handover for both advisers and their clients.

Top-of-the-line succession-planning programs or courses take advisers through a process that begins with preparing for any potential emergency exit. Moving to long-term planning, programs include legal and other professionals to help advisers think through the best approach for their eventual retirement and then structure that deal. Advisers who need help finding the right person to take over should look for a program that includes matchmaking.

Through the process, a good succession-planning program will also help advisers add value to their firm so they end up with the best outcome for themselves and clients.

Many experts agree that advisers should approach the idea of succession planning by first thinking about a more immediate, untimely exit.

“The first step is business continuity planning — solving what happens to the business if something happened to you today,” said John Furey, founder of Advisor Growth Strategies.

In fact, every adviser should have a continuity plan — a blueprint for how clients and the adviser’s family would be taken care of in the event of the adviser’s sudden death or disability. The Securities and Exchange Commission is increasingly asking advisers about such plans during examinations.

Advisers should have help creating a complete continuity plan, including the buy-sell agreement that would be executed at death or disability, and possibly an insurance policy that would help the buyer pay for the practice, Mr. Furey said. This process would include an appraisal of the business’ worth.

Both sides would have to agree in writing about whether payments to heirs would be in installments and whether they would be dependent on the amount of revenue retained by the succeeding adviser, he said.

MEET THE CLIENTS

The best continuity plans would attempt to ensure a successful transition by affording a way for the incoming adviser to meet the other adviser’s clients ahead of when he or she would be called into service.

“If the potential buyer isn’t getting to know the clients, that’s a lot of risk,” Mr. Furey said.

Jeff Vivacqua, first vice president of business strategy for Cambridge Investment Research Inc., said starting with the continuity plan — which he describes as advisers protecting their business as an asset — encourages advisers to focus naturally on the next evolution of their business. Then advisers can consider building a full succession plan around what’s important to them, he said.

At minimum, advisers need legal expertise in crafting an agreement. But most advisers should look for help from professionals who have constructed many different types of succession plans, such as sales to external buyers, internal sales, partial-book sales and mergers.

Advisers should make sure that the succession-planning program for which they sign up provides good “thinking partners,” a team that can act as a sounding board, and help structure and design a deal, said Ray Sclafani, founder and chief executive of ClientWise.

Often when advisers have built a firm and then look at how to replace themselves, they realize the difficulty — or impossibility — of finding a single person who can take on all their client, business development and technical responsibilities.

That is actually the fundamental reason most advisers haven’t addressed the issue, Mr. Sclafani said.

“There’s too many pieces of the puzzle they have to replace,” he said. “There isn’t one person who can do it all.”

A succession-planning program should help the adviser develop other individuals at the firm or bring in outside people to perform some of the skills that made the adviser successful, Mr. Sclafani said.

The goal is to make changes to the business so that clients feel that they are working with a team.

That team should include men and women of different ages to show a potential buyer that the adviser is thinking strategically about their business, which adds value to the firm itself, Mr. Sclafani said.

In fact, when presented with nine services that a succession-planning program might offer, 79% of advisers said that they want help making their firms more valuable, according to a survey of more than 500 advisers last summer by Mathew Greenwald & Associates Inc. for Signator Investors Inc.

Advisers will get the greatest value if they can show that their firms would operate successfully without them and that clients would remain after their own exit, said Nick Georgis, vice president of Schwab Advisor Services.

“Creating continuity is incredibly important to maximizing value,” he said.

BOOSTING VALUE

Some value drivers include having employment contracts, non-solicitation agreements, documented business processes, strong compliance procedures, and equity sharing with advisers or other key employees, Mr. Georgis said.

Institutionalizing relationships between clients and the firm — not just an individual — is key to showing a potential buyer that clients will stay on through a transition, he said.

Client demographics are also key to how much a buyer will pay, said Jeremy Holly, LPL Financial’s senior vice president for independent adviser services.

Firms with a younger client base are worth more than those with only clients in their 70s.

Also, a firm that has five households generating 75% of revenue may seem too risky for potential buyers, he said.

And more transition risk exists when the sale involves an external buyer versus an internal successor, Mr. Holly said.

Many succession programs, LPL’s included, also offer matchmaking between buyers and sellers. Such a feature is especially important to an adviser seeking an external buyer or partner without a lot of connections to other local advisers.

Overall, only about 11% of advisers have a completed succession plan, according to the Mathew Greenwald survey.

Some experts surmise that the reason why so few have plans may be that they just don’t want to retire.

Frank Campanale, chief executive with Lebenthal Wealth Advisors, said most advisers he knows don’t plan to retire even when they reach 70.

That doesn’t mean succession planning doesn’t apply to these advisers, though.

Many aging advisers are looking for opportunities to spend less time working, he said.

Good succession-planning programs help these advisers transition slowly into retirement.

“A lot of advisers are looking for a way to wean out of their business,” Mr. Campanale said.