Advisors cite the top reason for independence as, well, independence. The ability to design a practice consistent with your vision, where you can choose your direction and answer only to your clients is a tantalizing draw. But a substantial part of the financial equation is monetizing the equity that an advisor builds over time.

THE FORGOTTEN HALF

Many advisors overlook this aspect of independence. Perhaps it's because of the terminology we use to describe it. If "succession planning" were more plainly described as "the rest of your compensation," advisors might take more notice. But we continue to speak of succession planning in abstract, faintly altruistic terms such as "passing on your legacy" or "ensuring continuity for your clients." And while all of these are legitimate interests, they don't motivate in the same way self-interest does.

Of course, succession issues arise with every business, but they're more personal and are subject to more emotions in an entrepreneurial, closely held, professional services firm. Succession planning addresses how a person or group of people can pass on the business to another. And while that may seem like a lofty and altruistic goal, it is really the means to an end-for owners to realize a significant amount of value from their business.

Rather than waiting for some eureka moment when succession planning seems necessary, advisors should look at the ongoing cycle that starts the day they start the business. From that moment, the advisor has begun a progression of building value within this separate legal entity; breathing life into something that was nothing before by giving it a name and legal structure, furnishing it with ideas and concepts, and building business processes before even acknowledging the revenues. All the while, the advisor needs an objective in mind.

Industry studies indicate that not even half of advisors have a written succession plan in place. An advisor who has failed to do this impacts a long list of parties:

* For himself or herself, the advisor has failed to secure the other part of compensation that was likely critical in deciding to create an independent investment advisory firm in the first place;

* The firm's employees will be left scrambling for a solution in the absence of a well-laid plan;

* The business, while not a living being, has taken on a life of its own over time and its demise or significant diminution in value is fairly certain absent a plan;

* The advisor's family is left to deal with the disposition of a difficult asset, given complex valuation and regulatory issues; and

* The advisor's clients, to whom the advisor owes a fiduciary duty, are left to fend for themselves while the market continues to roil.

FOUR FLAVORS

Succession planning can take many forms, but generally it has four different flavors. The first is an internal succession plan with partners or key professional employees. The second is a merger with another firm. The third involves bringing in a new employee or partner for an eventual buyout. The fourth is a sale of the business or its cash flows to a venture capital, acquisition or roll-up firm. The most typical alternative to succession is the winding down of the business.

Different advisors will find these flavors more or less appetizing based on their specific circumstances. Generally speaking, the first option, the internal succession plan with a partner or key employee, is probably the easiest plan to put in place-provided, of course, that a financial advisor's business contains the right people.

The merger option is attractive so long as the advisors can identify an attractive partner, one that creates synergies and efficiencies between the two firms. Bringing in a new employee or partner is often the most challenging option, primarily because of the lengthy "getting to know you" period that is a necessary part of this strategy.

The sale of the business to an outside firm is a tantalizing option for advisors who envision themselves being part of a larger effort. But to secure hefty valuations, this option often requires that the advisor remain at the helm for an extended period of time and assume a significant portion of the risk in the interim. Certainly, winding down the business is the easiest option to pursue, but usually brings about the least desirable result.

IF NOT NOW, WHEN?

As the industry matures, the best firms are starting to address their initial succession plans during the firm's formation or soon thereafter. This is especially true when the succession plan takes the form of an agreement between partners or key employees. When an organization is just beginning, the parties are enchanted with one another, and the promise of a brighter future is in the air. So it's easiest at that time for these parties to reach an agreement on what happens when they no longer want to-or can't-work together.