SUCCESSION PLANNING FOR ADVISORS by Edwin P. Morrow ChFC, CFP, RFC Whether death comes suddenly or with some notice, it is still traumatic for those left behind. Financial planners advise their clients on this issue - but a great many have neglected taking steps personally toward planning for this inevitable event. Business succession planning forces a financial advisor to consider several unpleasant facts:his or her own death or disability and the fact that a practice that produces a good income may not have a substantial resale value. Succession planning for persons in the financial services industry is further complicated by the regulatory environment and the third parties involved:custodians, insurance companies and broker/dealers. It used to be a favorite game for insurance agency managers to parcel out the policy records of departed agents. Frequently, these "leads" went to favorites, to family members, or to the newest, inexperienced agents in the shop. Mutual fund resellers and broker/dealers have not been much better. Both the organization and the clients suffer when there is no succession plan in effect. Unfortunately, it is inevitable - we will all die - and many will become disabled before planning an orderly retirement from practice. Each financial advisor owes it to clients, employees and his or her family to make adequate plans. Where to Start If you have a primary life insurance company or broker/dealer relationship, write them a letter asking for whatever position papers or advice they can contribute. How have they acknowledged or participated in producer succession agreements? What requirements do they have? Who is the person with whom you should be dealing? Initiate this inquiry at the outset because response may take awhile, and you might receive valuable assistance. If you operate with a third-party custodian, inquire about what is its policy regarding communications, assignments and client notifications. One broker/dealer installed a unique successor clause in its contract with representatives. Continuity of investment and service is very important, and this broker recognized the need for continued client service. The succession features of the contract benefits the producer, the broker/dealer, the local planning firm and the clients. Upon the death, disability or passive retirement, the successor-licensed rep will receive 25% of the contracted compensation, and the original rep or beneficiary will receive 75% of all commissions and fees. Reps have the ability to negotiate alternate percentages. This payment will continue for twenty years. Payments to beneficiaries do not require a license, as they are not involved in servicing the business. However, the successor OSJ rep would receive full compensation on all new sales or investment level increases. A provision for active retirement permits a rep to continue servicing existing clients at full compensation without payout reductions and production requirements. Who Are Your Successors? A fortunate few financial advisors have a family member in their practice - but that may not be the most appropriate successor. The first question to ask yourself is, "If I died last night, what would I like to take place this morning? Who should have control? What should they pay? How would they pay it? Should some employees be protected? What role can insurance play? How would clients be served most effectively?" The problem of disability for a practitioner is a bit more difficult. Death is measurable; disability is frequently a matter of degree and definition. One financial planner was injured in a sporting accident. The brain damage impaired his judgment and ability to relate to employees and customers. Fortunately, he had a strong business associate and an understanding spouse. They confronted him and forced him to take an indeterminate leave of absence. The associate worked 75-hour weeks maintaining everything. Almost miraculously, the advisor recovered and returned to work - gradually after six months. How would a similar personal event be addressed in your own situation? Is there an available partner or associate? Is there an agreement in place? What is your definition of disability and is the waiting time appropriate for either an accident, a sudden illness or a gradually progressing incapacity? Are there sufficient disability insurance benefits to provide income replacement? How should the disability be addressed if you can never return to work? What if you phase back in slowly? Succession planning for retirement is a bit easier - provided it is not hastened by a health problem. At least one has the time to select a successor and negotiate terms. Valuation may be an issue here. Probably the nation's leading authority on practice valuation is Mark Tibergien, CFP of Seattle, who has frequently written on this topic. Mark indicates there are no absolute guidelines - but preparation and planning are always essential. Some Tough Questions Does this apply to me? If so, schedule a time now, this very minute, to consider and initiate planning. Put it on your calendar and do not postpone it. Commit your thoughts to writing. It will help you face some of these unpleasant questions and issues you must address. Does this apply to my firm? Chances are that if it does, you are aware that plans are in place. What's your responsibility if you are in doubt? Talk with the principal(s) today. If you are a bit reluctant to do so, use this article as an opening. Your initiation of this topic will be uncomfortable at first - but ultimately it will be welcomed. If you are 1 employed in a firm that is owned by one or two principals, and it has no succession plan and is not moving to create one - then you probably have a career-position evaluation decision. Does a third party need to be involved? If there is a broker/dealer, insurance company, or a custodian in the picture, then you should involve them at the outset. They have an interest in effective succession planning - and many firms will be eager to help. One life insurance company even had its legal staff draft an extensive agreement for two large producers, since it wanted to assure the continuity of its blocks of business. Succession Agreement Work Papers Some financial planning firms operate on a fee-only basis. Many also receive a major source of revenue from asset management fees. Others receive commissions from insurance, which may be written in the name of individuals with trailing commissions and service fees. However, insurance may be written in the name of a corporation or partnership entity, and revenue would continue to the business. Securities commissions are normally paid to individuals unless the firm itself is a broker/dealer. There is a serious problem with negotiating the continuity of securities trails and fees. These thoughts may help a planning firm design a partnership/stock agreement. Once you feel that you and your associate(s) have come to a mutual understanding, you should have an agreement prepared (and perhaps modified or re-written) by an attorney. If there are substantial differences between partners, (such as a mature, established planner age 50 and a new planner age 35) it might be wise to have each partner's attorney review the document before execution. What should be covered? Ideally, the final agreement document should cover the dissolution of the business in the event of: Death of a partner Disability of a partner Retirement of a partner Friendly separation Not-so-friendly separation What if you can't resolve all the subjects? Are you better off covering just some issues? The answer is a resounding "yes" for several reasons. That event, such as death, might happen to occur first. In that case, you have resolved the matter. If a different event occurs first, you at least have a guideline that can serve to help in the negotiation. Questions for each associate to answer. If each principal would review the following questions and record his or her opinions, attitudes or wishes, development of an agreement will be greatly aided. Who owns office equipment and furnishing? Frequently principals will personally own some items - and other items are owned by the business entity. This section can normally be completed quite easily. What is the approximate value of these items? Are there any items which, if you died or retired, you would want to have removed from the business and delivered to your family? Who owns publications and reference materials? Principals may have brought certain books, texts and reference materials to the business and may continue these subscriptions personally. Who owns what software personally? Approximate current value and ongoing maintenance charges paid personally. Are some clients the "property" of the planner? Many persons joining a partnership or corporation bring a base of clients. They may consider these to be "their" clients, rather than belonging to the firm. Thus, upon separation, they expect these clients to be "returned" to them. Some may be business entities and/or employee benefit plans. These should be listed and explained if necessary. Should there be some form of competition clause? In some circumstances, it is appropriate to have a non-competition clause. This could preclude contact with the firm's clients for a period of time. It might even have professional or geographic exclusions. However, the courts have held that such an exclusion will be inoperative if it attempts to deny a person the reasonable right to earn a living. Your attorney's advice is critical in this area since much of what can be enforced depends on state court rulings and local jurisdictions and practice. What if a partner leaves and competes? Are there some reasonable guidelines, which could be pre-agreed, that would provide for how one partner could withdraw and still continue locally in the business? What provisions do you feel should be included? Value if sold to a third party. Suppose a principal retired today as result of age, a desire to locate to another community or became totally and irrevocable disabled. In this case, the retiring partner would leave all clients and business equipment, furnishings and clients - and would not jeopardize the retention of all clients by the firm. What would you accept under those terms? What should the other principal(s) accept? Determine at what point someone is disabled. Many types of disability are not necessarily permanent. Persons have recovered long after the physicians gave up hope. Sometimes a person recovers from the physical aspects of an accident or illness - only to be left with no enthusiasm or without positive mental attitude. The longer a person is disabled, the more difficult would be the resumption of full working capacity. At some point - perhaps 6, 12 or 18 months - it should be presumed the person will not return to work - and the settlement agreement be activated. If you were to be disabled, in how many months should your inability to work be considered permanent and the settlement of your interest be triggered? How many months, if your associate/partner were to be disabled? Miscellaneous clauses. What other aspects of the current business operation, such as projects under development or special prospects, should be detailed in this agreement? Primary personal concerns. What are the most important aspects of this agreement to you personally that you want to be assured are addressed in a satisfactory manner? Summary - Expected Results Can I/we be successful in establishing an agreement? If you persevere, most assuredly you will enact plans that will work. Hopefully, the death and disability features will never be exercised. But, nevertheless you will derive several benefits: You will feel more comfortable Your employees will sleep better Your close family will have less fear You will be better able to help your clients Nothing can make you as effective a disciple of business succession planning than having done it for your own practice. There are millions of small businesses, and professional practitioners who need to undergo this process - and you can be of genuine service. But, please practice first on yourself. Ed Morrow is the author of Computerizing your Financial Planning Practice, the Complete Millennium Preparation Guide for Financial Advisors . He is also developer of the Text Library System used by 3,000 planning firms. He is a frequent speaker on practice management and technology to such organizations as the IAFP, ICFP, MDRT, IARFC and Society of Financial Service Professionals. For further information you may contact him at Financial Planning Consultants, Financial Planning Building, Box 42430, Middletown, OH 45042-0430, phone 800-666-1656 or email to: edm@financialsoftware.com