RIAs without a succession plan should take these steps immediately

Getting life insurance is a good start, and putting a continuity plan in place allows for changes down the road, says consultant David DeVoe

Feb 2, 2017 @ 8:17 pm

By Jeff Benjamin

For financial advisers, developing a serious and specific business succession plan is not easy. But what's more difficult is the challenge clients face if their adviser doesn't have one.

“If you don't have a continuity plan in place, the implications are tragic.” said David DeVoe, managing partner at consulting firm DeVoe & Co.

Speaking Thursday in San Diego at the TD Ameritrade LINC 2017 conference, Mr. DeVoe asked the audience of registered investment advisers to fess up if they did not have a business succession plan in place.

A few sheepishly raised their hands, while the elephant in the room became the question of why so many other advisers with succession plans would attend a session on how to prepare for succession.

“If you have no plan, the first thing you can do is literally tomorrow morning get some life insurance,” he said. “Or, have a banker on call to sell the firm if you get hit by a bus.”

From that point, Mr. DeVoe said the adviser needs to get a signed continuity agreement.

“The good thing about these continuity agreements is that they can always be changed and shifted,” he said.

In addition to pointing out that a succession plan could lead to more referrals from existing clients, Mr. DeVoe said the Securities and Exchange Commission has heard that between 60% and 70% of advisers don't have a plan.

"So, we can expect that succession plans will be required by the SEC at some point,” he said.

In fact, the SEC proposed a rule last summer requiring RIAs to have written business continuity plans.

Whether the plan involves grooming a successor from inside or outside the firm, or selling the firm, the key is to have a realistic idea of what the business is worth.

“If you're thinking two times revenue, you would be wrong, and if you're thinking 2.3 times revenue, you would be wronger,” he said. “For a typical firm with 25% margins, 1.7 times is closer. But using a multiple of revenue is simply the wrong way to value a firm."

Mr. DeVoe encouraged the audience to spend between $6,000 and $16,000 for a thorough and professional business valuation.

“The buyers these days are truly M&A ninjas,” he said. “I encourage you to go in smart and not be out-negotiated.”

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