Advisors excel at helping clients plan for the different stages of their lives. But when it comes to planning for stages of their own business lives-particularly the last one-many fail to take their own advice.

Many advisors think that when they feel ready to retire, they will create a plan for selling their practice or choosing a successor. Unfortunately, we often don't have that luxury in life.

In one sad case, a 58-year-old advisor in San Diego died suddenly while out on his daily morning jog. He had no known ailments, and he also had no instructions or plan in place in case something happened to him. His wife suffered from a chronic illness and could not handle making the decisions despite their attorneys and other professionals standing by ready to help. He had multiple businesses, and it took months for things to get organized. By that time, most of the clients were gone.

A client base and the assets and revenue it represents are likely to shrink if a planner can't work. But this outcome wasn't inevitable: If he had chosen a successor in advance, he could have avoided the strain on his ailing spouse and saved many clients.

Another advisor looked ahead and began planning as soon as she learned she had cancer at 56. She dedicated time to discussing "good fit" criteria between potential successors and clients, including her husband and a key assistant as well as her branch manager, broker-dealer and FP Transitions. Her successor was younger but had the same high-touch client relationship style and investment philosophy. She and the successor held an event for clients that was rewarding for everyone, and the business retained all of her clients.

As advisors know, and these examples show, planning ahead makes all the difference. Yet a study presented at the Financial Services Institute conference in 2009 found that more than a quarter of independent advisors did not have a succession plan. Just like clients who put off buying life or disability insurance, or writing an estate plan, advisors avoid planning for tragedy and the next stage. As planners, we need to ask, "Am I going to leave the end result of all my dreams, hardships and hard work-as well as the future well-being of my family-to chance?"

Once dedicated to choosing a successor, the three greatest challenges advisors face are fulfilling all the due diligence steps to select a good fit, working around pitfalls in the deal and not cutting corners on logistics.



The most likely choices for a successor are family heirs or long-time employees, but often these usual suspects are not the best fit for the business the advisor has built. Potential successors must be put through rigorous due diligence to make sure their strengths, goals and personality match the business and the majority of the clients.

What happens when an advisor fails to do the necessary due diligence? A 63-year-old advisor in California retired and sold his book of high-net-worth clients to another advisor who offered the highest bid. The deal included a down payment and an earn-out or revenue-sharing arrangement, while the focus of the deal was getting the highest possible dollar amount, including any gains in revenue over the ensuing few years. Since the retiring advisor stayed licensed during the earn-out period, this should have been a win-win situation.

However, the seller overlooked a key piece of due diligence: the fact that the services and products he normally sold were quite different from those the successor favored. The buyer was focused on the client relationship and selected very conservative investment options.

After the sale, the revenue stream dramatically changed from large upfront commissions to asset management fees. The seller was receiving substantially less than he expected, and threatened a lawsuit. The tense working relationship diverted a lot of the successor's time, although nearly all of the clients appreciated the successor and stayed with her.

On the other hand, here's a good example of proper due diligence: An advisor considering buying a practice saw in advance that half of its assets came from three clients. In his offer, he put the burden on the retiring advisor to cement the relationship with these clients and accept a final lower price if they left. The offer included a potential higher-end price, but a lower down payment and price adjustment clause after two years. In the end, the deal didn't work out, but the potential buyer came away feeling that he made the right decision.



Drawing up a deal for a succession plan can be tedious and time consuming for advisors, but necessary. It is best to keep the deal as simple as possible without added clauses. Advisors should focus strictly on assets and draft a deal that is realistic for both sides.

As a cautionary tale, consider what happened to a 62-year-old retiring advisor. He agreed to introduce his clients slowly to his successor, who was younger and dedicated but much less experienced. The two already worked together and had a comfortable relationship. Unfortunately, the retiring advisor passed away soon after the deal, leaving the successor scrambling to meet all the new clients. When the markets went south, she lost many of the clients, and the revenue stream dropped by half.

The plan had involved making fixed monthly payments for six years, retaining the retiring advisor's office space and keeping the advisor's spouse as an employee with health benefits for a handicapped son. When business fell, the successor and the surviving spouse renegotiated lower monthly payments, but in the end the successor could no longer afford those payments or to keep employing the wife and paying health insurance.

In this case, the buying advisor never should have taken on the burden of supporting the selling advisor's family. The selling advisor should have considered other options for funding his family's healthcare needs, such as additional life insurance. While a heartfelt gesture, the buyer's commitment was not a good business decision. In the end, the practice dwindled by 75%, and the deceased advisor's spouse had to use up her savings and rely on Medicare.



After spending so much time finding a successor and creating a deal, it can seem inviting to put off thinking about the details of the transition. Unfortunately this can create more work later and allow clients to fall through the cracks, hurting both the seller and the buyer.

Communication is key. Before a buyer acquires a business, he or she should discuss with clients, broker-dealers and other employees what changes will need to take place. Skipping or putting off logistics and communication can derail the transition.

For example, a group of advisors bought a book of RIA clients promising that no changes would be made to their accounts. They planned to meet with all the clients within the first three months of the transition. Although they were able to meet face-to-face with almost all the clients, they chose not to do the paperwork for the transition until at least the second client meeting, to make sure the clients were happy with the new relationship.

After 90 days, the broker-dealer stopped passing through the compensation related to the acquired accounts because of the missing paperwork. This suddenly put a crunch on the business to get the paperwork signed. The cash flow from the acquired book of business was being used to pay for the practice, but with less revenue, the buyers needed to tap their own reserves. A mad frenzy ensued to get clients to complete and return the required documentation, which made the office look disorganized. Several key accounts left.

Better organization and communication makes for a much more successful transition. In another case, an advisory office created a client communication and transition plan, clarified the requirements with the clients up front, created a special toll-free hotline for the newly acquired clients and opened a temporary location close to where the bulk of the clients lived.

The buying advisor quickly divided the new business between himself and his son, a junior advisor in the firm, and hired a trusted prior employee to man the hotline. The cost was included in the original calculations, and the deal provided a look-back period to adjust the sale price after one year to hedge against client loss.

The end result was that almost all of the clients stayed. Enough additional revenue was also generated so that the buyers were able to pay off the deal in about half the expected time.

By making the time now to create a contingency, succession or exit plan, mapping out all the details and conducting thorough due diligence to find a successor, advisors can smooth the way so that their businesses flourish in the hands of the next generation or new owners. Taking care now will give you and your family peace of mind as retirement approaches.


Roger Verboon, senior practice management consultant at Securities America in La Vista, Neb., helps advisors improve the efficiency and profitability of their practices with a focus on planning, staffing and client feedback.

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