“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.
Advisor: I heard you speak at my dealer firm’s conference recently on the topic of succession planning for advisors. I first thought that subject wouldn’t apply to me because I am only 34 years old and retirement isn’t even in my consciousness at this stage of my career. But I was struck by the comment you made that all advisors should always have their practice ready for sale – at any time, to the most qualified buyer, for the highest price – because you never know what might happen to cause a sale. You mentioned the big “Ds” – death and disability – as well as a number of other events that could prompt a sale.
Coincidently, I was speaking a week ago with a client who owns a manufacturing firm. He was telling me about his recently developed “disaster plan” for his business. That got me wondering what would happen to my business if I was suddenly unable to run it. Should advisors in my position have a disaster plan?
Coach says: As a result of the aging advisor population, succession planning has gained so much prominence lately that it’s easy to forget there are many younger advisors for whom the topic is not high on their list of what’s important to their business today.
I can shorten the answer to your question about whether you should have your own disaster plan by asking: “Are you prepared for an unexpected disruption of your business?”
If the answer is “yes,” you need read no further.
If, on the other hand, you don’t know how your practice will actually carry on if you die or become disabled, so that your heirs will benefit from your life’s work and your clients will be taken care of, you should have a plan for the unexpected.
What your client described as his “disaster plan” is probably more about what should happen to his business in the event of a catastrophic event, such as a fire, a flood, computer-system failure and so on. All of those events also would be disruptive to an advisor. But because most advisory practices are relatively small and very much dependent on the founding advisor being there every day, I’d prefer to call what you need a “contingency plan” rather than a disaster plan.
By thinking of it this way, you also can use your contingency plan as the foundation for your succession plan because both plans are about what will happen in your practice when you are no longer running it.
One key difference is that succession plans often are implemented over a period of months or years, whereas a contingency plan is triggered immediately, once your inability to work for an indefinite period (or ever again) becomes apparent.
A contingency plan also has to anticipate the possibility that you might, some day, return to running your practice. Succession plans typically assume you will never return (although I know of one instance in which the succession plan did not work out and the founding advisor repurchased the practice).
Contingency plans force you to think about your own mortality or morbidity, which is a good thing to do periodically for both personal and professional peace of mind. Here are some steps for creating a basic contingency plan:
Step 1: pick a partner
Creating a contingency plan starts with finding a suitable contingency partner – someone you know and trust to carry on your business in your absence. Although your staff should be able to manage through the first days or weeks, if you are going to be away much longer than you would typically spend on vacation, you will need someone with the appropriate registration and experience to serve your clients.
This person also must have the capacity to take on your book of business and, ideally, would share your investment philosophy and be willing to treat your clients and your staff as you would.
Bear in mind that the person you would choose to run your business for, say, six months may not be the person you would choose to buy your practice in the event of your death. In that case, I’d suggest preparing for the worst-case scenario and anticipating what could, effectively, be the sale of your business.
Step 2: gather input
A number of people will be affected significantly by your long-term disability or death. First and foremost, of course, will be your family. Discuss with family members what they would prefer to see happen in the event your contingency plan has to be implemented. Are they prepared to run the business? Do they want a say, even if they are not in charge? What financial expectations would they have?
@page_break@ We are assuming, of course, that your own will and insurance program, powers of attorney and investment account beneficiaries are up to date and adequately account for the possible sale of your business.
Meet with your staff and ask them: “If I had a heart attack last night and couldn’t work, what decisions would be required and what steps would have to be taken to ensure the business continues running over the next 30 days; 60 to 90 days; six months; one year?”
Talk to your dealer firm to see what resources it has in place to assist with the short- and long-term management of your practice or its ultimate sale, if required. Ask about any restrictions regarding who can take over your client base.
And don’t forget your clients. They will feel more comfortable knowing you have a contingency plan in place, so don’t be afraid to tell them. They will be more likely to transfer their accounts to your chosen contingency partner if they are aware of him or her in advance. For clients who own businesses, having a contingency plan in place also gives you another way to add value to your relationship – by assisting them in creating their own business contingency plans, over and above their disaster plans.
You even can tell your prospective clients. They don’t need all the details. However, knowing that you practice what you preach about the importance of planning may be just the thing that converts them from prospects to clients.
Step 3: get a valuation
Having a valuation of your practice will be helpful in setting expectations regarding price if the practice must be sold. I recommend getting a professional valuation by someone who understands the financial advisory business, so your family doesn’t have to rely on “rules of thumb” if they need to negotiate with your contingency partner.
In addition, a proper valuation can identify areas of your practice that could be improved to increase its value, which will be worthwhile regardless of whether your contingency plan has to be implemented.
Step 4: document your plan
While your agreement with your contingency partner doesn’t have to be complicated, it should qualify as a valid legal document that addresses two important issues: how you and your contingency partner will be compensated until you can return to work; and, if you are unable to return to work, how the business may be acquired by your partner. This document should include appropriate non-competition language.
Get legal advice. Share your plan with everyone it affects, including your family, your staff, your contingency partner, your dealer firm and your lawyer. Keep copies where they can be accessed easily in an emergency.
Finally, of course, update your plan whenever anything relevant changes in your personal life or your business life.
It is important to create a plan that works for you. Contingency agreements are relatively easy to change, so don’t get bogged down in the details. Your goal should be to put something in place to ensure you’re protecting your family, that your clients continue to be well served and that you get fair value for your business.
George Hartman is co-founder and managing partner of Accretive Advisor Inc. and president of Market Logics Inc. Send questions, comments and opinions on any aspect of practice management to firstname.lastname@example.org.
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