Why financial advisers need to actively manage their continuity plans

Consider this scenario: An adviser, let’s call her “Nancy,” has worked hard during her career to build a solid business. After decades, her practice has become everything she dreamed it would be: she has 100 loyal clients who respect and trust her judgment even during market fluctuations; she can delegate work to her competent support staff without having to hover; and the firm experiences few, if any, internal crises on a regular basis. She is proud of her well-oiled machine.

Given Nancy’s business orientation, a continuity plan was a given. Several years ago, she secured a written agreement with a local adviser 15 years her junior. She wonders why many of her counterparts haven’t done the same. She has noticed that many advisers who say they intend to “die with their boots on” change their mind after experiencing some triggering event. At that point, they become eager to monetize the business, but it’s usually too late. By the time they want to transfer the business, their 80-year-old clients have drawn down their accounts to the extent that the business is no longer attractive to other advisers. And they start feeling guilty that they haven’t done right by their clients.

(More: 5 ways financial advisers are handling succession plans)

Nancy is having the exact opposite experience. She has peace of mind knowing that she has addressed this critical issue and attended to her clients’ best interest.

But even the best-laid plans can derail fast.

Can you imagine Nancy’s surprise when her continuity partner calls to tell her he is leaving the area? His in-laws have passed and left his wife considerable wealth. The couple is moving across the country, and he plans to retain only 25 of his best clients. Then comes the real kicker: Would Nancy be interested in buying his clients?

Sure, the signed agreement might force him into a purchase. But given that many deals are based on an earn-out arrangement where payments the seller receives are based on retention and continued service to clients, Nancy knows this simply isn’t going to work for anyone — most of all, her clients.

Unlike the debate between active versus passive investment management, continuity and succession planning has a clear response: You can’t set it and forget it. Your plan must be actively managed.

(More: Hammering out succession plans that work for everyone)

KEEP WATCH OVER CONTINUITY​

What could Nancy have done to avoid this unfortunate situation?

She needed to regularly check in with the buyer instead of assuming everything was going to work out fine. Annual meetings would have been at least one way to keep tabs on him. Here are a few key topics they could have discussed:

• Their health and that of their immediate family. Buyer and seller are embarking on a business transaction — but personal situations easily spill over into how the transaction plays out (or fails). How would a significant change in circumstances affect their time table, the buyer’s ability to pay up, and his interest in taking over?

• Success of the buyer. It’s a delicate topic but must be addressed. The buyer’s financial capability to transact the deal could shift if his firm has a bad year. Or the buyer could be doing so well that the deal should be accelerated — if the seller’s clients would benefit by the new talent the buyer is adding to his firm.

• Passion for the industry. The eager, younger buyer’s interest in Nancy’s clients could wane after five years of growing his own book. Or he could simply become turned off by the industry’s regulation-heavy outlook.

FAIR IS FAIR

The buyer also has the right to probe the seller. Has the seller thought beyond continuity planning to a planned exit from the business? Or has the seller lost clients in the past year? And don’t overlook the potential for cognitive decline; diminished capacity doesn’t just affect clients — it can manifest in advisers as well.

(More: RIAs must confront the emotional side of letting go of their business)

Certainly, these are personal topics, and neither side can assume the other adviser is being 100% honest all the time. But an annual check-in does encourage open communication and should minimize sudden surprises.

This also works if your continuity or succession agreement is with one or more advisers within your ensemble firm. Whether they’re internal or external, both parties should revisit their agreement annually to ensure that the partnership continues to meet the needs of the buyer, seller and clients.

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.