When the young advisor received the call that one of his partners had died, he assumed it was the older partner, 35 years his senior.
He and his partners had planned for that, purchased life insurance and created agreements for purchasing that partner's share from his widow. They had spent hours and thousands of dollars in legal fees to get it right, and they had updated the plan every three to five years to keep up with their growing practice.
But it wasn't the senior partner who had died. It was the 52-year-old partner. A scenario they had not planned for. As a result, their practice was dealt a significant blow that it's still recovering from eight years later.
Like the partners in this real story, most advisors have done little or nothing to prepare for the unexpected. Surveys show as many as 75 percent are operating without the safety net provided by a continuity and succession plan.
With clients, partners, employees and family members all depending on a practice to continue operating in an advisor's absence, it's vital that every independent financial advisor has a detailed plan that will take effect if they are no longer able to work.
Continuity or succession plan? You need both.
A continuity plan is a great first step toward creating your succession plan. Like a succession plan, a continuity plan lays out what you want to happen to your practice when you can no longer run it.
Unlike a succession plan, a continuity plan is implemented immediately, rather than over a period of months or years, due to an unexpected disruption in your ability to work. Also, a succession plan typically assumes you will not return to run the practice; a continuity plan addresses the possibility that you will.
The best continuity plan takes into consideration every aspect of the business and clearly outlines who needs to do what, how to do it and when.
When put into effect, a successful continuity arrangement eliminates confusion, continues service, maintains security of sensitive information and generates value to key stakeholders.
To get started on your plan, you need a vision of what your practice would look like without you running it, both temporarily and permanently. To form that vision, start by answering these questions:
- Who would run your practice in an emergency?
- What are your financial needs after you exit?
- Who is your ideal successor?
- What does your ideal exit look like?
- What is the best business exit option for you?
Put your answers in writing. Share them with your staff and family. They're important to this process, too, so be sure to get their input.
For your revenue stream to continue, at a minimum, you need to have a written agreement on file with a broker-dealer that clearly identifies who your successor will be in the event you are no longer able to work. In the absence of this, the broker-dealer will make best efforts to ensure your clients are able to receive the service they need, either by locating another advisor or by converting your clients to house accounts.
The best continuity agreement is much more thorough. It includes:
- Who your chosen continuity partner will be.
- What the partner will need to do immediately to service your clients and operate the business.
- Whether this partner will buy the business or agree to take care of it and prepare it for sale to a third party.
- How your business is to be valued.
- How purchase payments will be made and to whom.
This agreement needs to be in writing, signed by all parties involved, filed with key players in terms of your business and estate planning. It also needs to be communicated to your spouse, staff and the appointed executor of your estate.
Let clients know you are prepared
Advisors often overlook the marketing benefit a continuity plan provides.
From a marketing perspective, you can let clients and prospective clients know you have taken the time to secure your practice.
On a deeper level, they know you have their interest protected at all times. Communicating that your practice is covered, assures them their financial affairs will be taken care of, even if something happens to you.
As an advisor, you advise people every day on how to prepare for a more secure future. It's important that you also take time to develop a plan to prepare for your own.
To help you get started building a plan that's right for your practice, be sure to download a free copy of Securities America's Succession Plan Guide.
This content is made possible by Securities America; it is not written by and does not necessarily reflect the views of InvestmentNews' editorial staff.