Be prepared to implement succession plan

One day in September, “Ralph” was diagnosed with Stage IV cancer. Compared with other financial advisory firms, his business was semi-prepared for this blow. He had identified a continuity partner and they had a written agreement stating that if anything happened to either of them, the other would assume responsibility for the practice. But Ralph’s successor had never been formally or informally introduced to Ralph’s clients, nor had a buy-sell agreement been signed.

Ralph remained hopeful that he would beat his illness and intended to continue working as long as possible. After all, he asked himself, why give up a satisfying and financially rewarding profession before he had to? And with new cancer treatments being introduced daily, who knew what the outcome might be?

Ralph and his successor met with as many top clients as possible in the weeks following Ralph’s diagnosis, but the side effects of chemotherapy required Ralph to cease making introductions. Finally, Ralph’s wife stepped in to call the shots, telling him that he could no longer go on client appointments. In addition, she negotiated a price for the practice and signed a buy-sell agreement. Within two months, Ralph was dead.

PROPER PLANNING

Advisers like Ralph care deeply about their clients. Yet when it comes to planning for the inevitable, they stick their heads in the sand, apparently willing to assume the risk of not protecting their biggest personal asset — their businesses.

After decades of building a business, an adviser has created an entity that holds significant value. Indeed, many advisers finally have arrived at a point where everything is moving along nicely — new clients come in via referrals, cash flow is satisfying and the practice is running smoothly. Then, one day, everything changes.

An adviser who is unprepared for succession and facing the last stages of life may feel guilt, regret and shame. “What will happen to my clients? Will they feel betrayed? They expected me to make arrangements for the inevitable, but they’ll find out that I didn’t practice what I preached. Why didn’t I prepare for this?”

Unless an appropriate succession plan is in place ahead of time, an adviser’s significant other must rely on family members, friends and trusted advisers to find a successor, negotiate a deal and transition the business to a new adviser. A process that can typically take more than a year must be compressed into weeks. Imagine what that would be like. It’s hard enough for advisers to embrace concepts such as earn-outs, promissory notes and valuation approaches; in these situations, those outside the industry are left especially vulnerable.

A greater problem is that when there is no one available to introduce clients to a new adviser and to help transfer trust, the value of the practice dissipates rapidly. Looking into the clients’ eyes and assuring them that the successor is a good person whom the client can trust is not merely a nice thing to do; it’s invaluable. It takes a client far less time to find a new adviser than it takes a financial adviser to find a successor, and even clients who have been loyal for decades will move their assets sooner rather than later.

Incapacitation is not unusual. When a deal is in the works, it may be the spouse rather than the adviser who completes it. Yet many spouses don’t know whether they have power of attorney over business decisions or what that means. In the event of the adviser’s death before the completion of a buy-sell, there’s potential for a fire sale.

Not sure where to start in preparing a succession plan? Here are some basic tips:

At a minimum, you need a continuity partner. Concerned about such a commitment? A continuity arrangement can be canceled by either party if notice is given within a predetermined time frame.

Within three to five years of retirement, you need a written succession plan with a signed buy-sell agreement, letters to clients and articulation of who will do what from that point on. This may include your continuing to work in the business as an adviser as long as you are wanted and able.

POWER OF ATTORNEY

Finally, you need a designated power of attorney for business issues. Moreover, the person with that authority must understand what that involves and what decisions he or she may be asked to make.

These minimum steps apply to all advisers but especially to boomers. Resolve to address this critical business issue in 2011.

Joni Youngwirth is the managing principal of practice management at Commonwealth Financial Network. She can be reached at [email protected].