Three hurdles to enacting a plan

The most popular succession plan among financial advisers is to have no plan at all. While the majority of advisers have given at least some thought to what will happen to their businesses and their clients should they retire or the unexpected occur, a shockingly low number have committed those plans to paper. And until it's on paper, it's not real. Advisers dole out advice for a living and, in many instances, help other small-business owners plan for retirement or ownership transition in the case of failing health or an emergency. But they don't do the same for themselves — another case of the cobbler's children going barefoot. One obvious reason is that few people want to think about their own mortality. That is why insurance is sold, not bought. But I've also seen that the vast majority of advisers simply love what they do, and want to keep doing it right up until the very end — “to die with their boots on.” They simply would not commit themselves to the advice business without a genuine love of the profession and belief in their ability to help clients reach their goals. Yet we've all heard stories of advisers' suddenly becoming unable to continue running their businesses, whether because of health reasons or an accident. It can and does happen. When it does, the burden falls directly on the adviser's family. Who will keep running the business? How will they realize the value from all that shoe leather represented by those decades of work? Right after concern for family comes concern for clients. To whom will they turn for help? These clients often have been with the same adviser for decades and might be as unwilling to seek a new one as their adviser is to see them fall into the hands of an unknown professional. Often we find that advisers who don't want to talk about succession become more engaged when they start to think about their 80-year-old widowed client. Personalizing the immediate need for a succession plan helps create real answers to these questions.

THE FIRST HURDLE

For advisers who understand the importance of a succession plan and are willing to plot out the transition from one owner to another, the first major hurdle is finding the appropriate person to take over the business. Unfortunately, there is no litmus test for determining who will make a good succession candidate. The only way to truly know how a potential successor would interact with clients is to see the process firsthand. For this reason, most successors come from one of two pools — someone the adviser hired, trained and worked with for a significant length of time or an adviser from the same community who is known and respected. Two important questions to consider: Do you trust this person? Does he or she think about the business the way you do? Since trust must be earned, a worthy successor is more often than not someone already among the adviser's inner circle well before the issue of succession enters the picture. Once the successor is identified, it's time to start mapping out the agreement and transition. Putting it on paper can stress the strongest partnerships. There are numerous nuts and bolts to be considered and many issues to work out from both the business and client relationship sides.

CASHING OUT

Advisers typically can work through these issues, leaving the matters of valuation and financing. While owners want to realize the value they have built, most times, parties can come to a suitable agreement on valuation after some serious negotiation. After that comes the hard part: The successor typically does not have the capital to cash out the retiring adviser. Many significant but smaller advisory firms — say, in the $30 million to $300 million range — struggle to find a partner that can help them finance and finalize a deal. Advisory firms with more than $500 million in assets under management often turn to a “consolidator.” In many cases, buyers work out long-term deals with sellers. A trusted successor and the ability to finance the deal are just two of many challenges that need to be addressed when planning the next phase of your business. But the alternative is leaving the future of your business, your family's well-being and the well-being of your clients up to fate. That's not a wise choice. Barnaby Grist is executive vice president of wealth management at Cetera Financial Group, a family of independent broker-dealers.