It seems to me that sole practitioners-those advisors who most need a backup plan in the event of disability-are usually the last to develop such a plan.
It's surprising these advisors leave themselves so exposed, but their inaction is somewhat understandable. Multipartner firms have built-in protection in that partners can establish buy-sell arrangements and keep their firms afloat when one partner dies or takes six months off for back surgery. Even sole practitioners, if they're reps under a common broker-dealer roof, can fairly easily establish as-needed succession arrangements with each other.
But what of the sole practitioners who function as independent RIAs? There's no established game plan or template for setting up arrangements with fellow practitioners to back each other up in case of a calamity affecting one of the practices. That is, unless these practitioners take the initiative and set up such a plan on their own.
Which is what Rozanna Patane realized she needed to do. Patane, an independent, fee-only financial advisor in York Harbor, Maine, saw it this way: "I started my business in 1992 after leaving a corporate finance career, have always been a solo practitioner and now, at age 62, I've begun to think about what would happen to my clients if something happened to me." Patane also wanted to pass on the value of the practice to her 18-year-old daughter, if possible.
So she did what comes natural to her-she consulted her close industry friends (both geographically close and otherwise): Faye Doria, Susan Veligor and Jill Boynton. Doria owns Financial Guidance Associates Inc. in Dover, N.H., while Veligor and Boynton together own Cornerstone Financial Planning LLC in Portland, Maine. What the group did was create a maze of arrangements between and among each other designed to cover the necessary bases for all concerned.
Patane and the others would see each other regularly at industry conferences, which is where the plan began. "We had some informational talks and then I sent everyone an e-mail," says Patane, "saying, 'I'm the one with the concern here,' and asking them if they'd be willing to consider a succession planning arrangement. That was followed with more specific conversations about what such an arrangement would look like."
Of course, to work properly, any agreement must consider the differences that exist among these four advisors' practices. Patane, who began her business in 1992, offers clients both comprehensive planning and investment management. "Some of my clients are of modest means or they're women whom I just like assisting. The other half are wealthier ... the more traditional clients you find in most practices."
A little background on Doria, Boynton and Veligor: Doria, age 55, started in business in 1987 working for Ballentine, Finn & Company in Wolfeboro, N.H., and later made a brief foray into financial planning within a bank, but otherwise she has been mainly a solo operator, and is now in the same boat with Patane. She works primarily on an hourly basis and doesn't manage money. Boynton, at 49, and Veligor, at 52, started their business together in 2004 after working for other advisors. Says Boynton, "Our practice is a hybrid of Rozanna's and Faye's in which we do comprehensive financial planning and investment management for most of our clients-and hourly for some."
Hence, the plan-in the event of Patane's death or disability-is for Doria to take Patane's smaller clients and for Veligor and Boynton to take the larger ones. The four planners first sat down to discuss their plan in October 2007, and Doria wrote the first draft of the agreement between herself and Patane. "We took some documents we already had, just kind of cut and pasted, and the spirit of the whole thing came together quickly. As we worked through several revisions, though, it got more complicated." Once done, Patane used the agreement with Doria as a basis for the separate agreement that eventually emerged with Boynton and Veligor.
"Once I had draft agreements, we started thinking of questions and it readily became clear that I needed to get a professional involved," says Patane. Among others (including a compliance consultant and several fellow planners), Veligor contacted Tom Giachetti, the well-known compliance attorney at Stark & Stark in Princeton, N.J., to look over their draft.
Giachetti raised three critical issues. First, he explained to Patane that there is no regulatory requirement that she inform her clients in advance that she might hire a subadvisor in the event of a temporary disability. In the event of death, Patane's practice would be sold to her successors. "If she has the discretion to manage assets," says Giachetti, "and it extends to engaging subadvisors, then it would be prudent to say to clients, 'In the event of my untimely demise, I've made arrangements with another firm,' but there's no requirement that she do so."
As for Patane's ADV, Giachetti likewise advised that it wouldn't need updating unless Patane's situation changed. "So part of what I will do," says Patane, "is write up the language for an ADV amendment ahead of time and, should my situation warrant it, my one assistant can take care of amending our ADV."
Second, Giachetti suggested Patane reconfirm these two arrangements each year since change is inevitable. "The sticking point brought up with Tom was-in case of my death-how would we make the transition with custodians seamless?" In other words, how would Veligor and Boynton become the official advisors on Patane's client accounts before those clients moved on to an altogether different advisor, or before the custodian denied the successors access to the client accounts? Giachetti advised that Patane get a written acknowledgment from her custodian, TD Ameritrade, about what that transition would look like. "If I've died," says Patane, "then technically my client accounts are closed, so it's tricky." The answer, says Giachetti, is reconfirming annually with both successors and one's custodian. "It's not just a feel-good thing," says Giachetti. "The succession plan must work if it's needed."
Then there was Giachetti's third critical issue. "Finally, Tom also said my will should fully empower my executor to continue managing my business with TD Ameritrade," says Patane.
Most wills either ignore business issues like Patane's, or they give the executors broad powers, but not always the necessary power. Says Giachetti, "The will must be clear in saying that the executors will have full authority to both own and manage the business."
Patane says she'd considered just assigning client contracts to her successors ahead of time. "I would get my clients' approval now saying that, in the event of my death, the client agrees the contract would be assigned to another advisor. But Tom convinced us it wouldn't work because there were too many incompatibilities in our firms' pricing and structure. Down the road it perhaps would work if we were to align our practices more."
What do Patane's agreements with Doria and Boynton/Veligor look like, how were they negotiated and what were the tallest hurdles? Boynton says, "The most difficult thing to verbalize in the contract was the payment plan to Rozanna's estate. We didn't have trouble negotiating the payment; we just couldn't figure out how to best say things, which gave rise to many revisions. (Patane and company didn't actually have a third party draft their agreement; they did it themselves with input from Giachetti and their other legal advisors.)
"The hardest thing for me," says Doria, "was thinking about how I would absorb a bunch of new clients. I'm sort of semi-retired and don't really want any more clients. But we figured out that it was really a pretty limited number I'd end up with if the plan were to spring into effect, so I would probably just stop taking other new clients for a while."
"I have about ten to 12 clients with under a half million dollars in assets who would go to Faye," says Patane, "with the rest going to Jill and Susan. "Also, she adds, my clients wouldn't be starting from scratch with their planning, so they wouldn't be as difficult to absorb as new clients."
In the event of Patane's death, Doria's payments would extend over five years, but with a twist: "I would pay Rozanna based on what I bill clients, and not what she bills her clients," says Doria. "Since my fee structure is hourly, for the most part, I didn't want to be locked into paying Rozanna based on what she bills the clients [I'd be handling]. We agreed on my paying her [or her estate] 1.5 times the revenue I bill her clients over five years-50% the first year and 25% for next four years." If Patane is disabled, Doria would collect her normal hourly rate during the time she serves Patane's clients.
"In working out our agreement with Rozanna," says Veligor, "we approached it by asking, 'How can we make this agreement work so it's fair to all parties?' We never had a conflict about that; it was more that we were trying to think about each other in equal terms."
Patane, Veligor and Boynton ended up with an agreement that Cornerstone would pay Patane's estate 1.7 times actual revenues earned by Patane from select clients during the 12 months before her death in quarterly installments over five years beginning six months after the agreement goes into effect.
However, their agreement differs from many others in its treatment of client attrition. While advisors frequently treat attrition as a loss to both the buyer and the seller (and an incentive for buyer and seller to work closely for the benefit of their respective income streams), Patane's agreement with Cornerstone includes language addressing how, during the five-year payout period, payments are to be adjusted if a client leaves. If the attrition occurs during the first two and a half years of the agreement, payments to Patane's estate cease completely; after two and a half years, however, a neutral arbitrator may be brought in if there exists a question about whether the separation was under Cornerstone's control. Of course, if a client dies, there's no penalty to the buyers, but if he or she moves away or is unhappy with the services, then Veligor and Boynton would have to continue payments unless an arbitrator determines that the client's leaving was not caused by something Cornerstone did.
How did Patane and her two successors arrive at the valuations cited in their agreements? "We'd all done research on offers made for other practices," says Patane. "I thought what Faye offered and what Susan and Jill offered was very fair, based on our research."
Valuations depend on many factors, not the least of which are the technology and client service systems employed by the different parties. The more similar the systems, the more potentially profitable is the deal. In Patane's case, these systems weren't all that similar. For example, says Doria, "Rozanna uses Macs in her practice, while I use PCs." That said, Patane's computers are the new iMacs running PC software, so she has no trouble communicating with clients who use PCs. "And my assistant can format the data on my iMac drive to be compatible with a PC," adds Patane, should her successor need the data to continue service to her clients.
So we've dissected Patane's two succession plans. How about Veligor/Boynton and Doria ... what will they do for their own succession plans? Veligor and Boynton have each other, of course, and Doria has another agreement-this one with a member of the Garrett Planning Network (GPN). (Although Doria isn't a member of the network, the Garrett planners typically work on an hourly basis, making them appropriate candidates to absorb her clients should anything happen to her.)
"My own succession plan doesn't involve Patane, Veligor or Boynton because they wouldn't want my clients," says Doria. "I have an informal verbal agreement with a Garrett planner to take over my clients if something happens to me. My executor would direct my clients to this planner, but nothing will be paid to my estate."
Doria says she's saved her pennies and doesn't care about compensation for her clients. Of course, hourly clients don't represent nearly as reliable a future income stream as those who are on retainer or those who pay according to assets under management-which makes it harder to sell such a practice in the first place.
If you're a solo practitioner needing a succession plan like Patane's, what can you do to get started implementing one? Says Patane, "I would definitely develop close relationships with other planners whom you trust; that will make possible planning that might not otherwise be possible." She notes that her "team" keeps coming back to questions they couldn't answer because of events they couldn't anticipate, such as changing regulations, etc. "But if the relationships among us are good, I feel confident a good decision will be made, either before or after my death," says Patane.
The main obstacle, say Patane and her team, is that there isn't some well-established, well-understood process with boilerplate documents for creating a solo practitioner succession plan. "We spent a lot of time and energy on the drafts," says Doria. Planners should also consider whether to split their practices into two or more pieces catering to the very different clients they serve. For example, Patane and team saw an obvious split between clients who prefer a lower-profile, hourly type of service, and those who wanted comprehensive financial planning plus investment management, clients that are typically billed with AUM or retainer fees.
With solo practitioner agreements, it's important to remember how easily circumstances can change, adds Patane. "Jill and Susan could reach a point of practice maturity like that of Faye," she says, "meaning their practice might grow too big, making absorption of my clients impossible. Or, I could decide to take a planner into my practice [giving me some new succession options]." The picture Patane draws is one of practices constantly in flux, requiring agreements that are both flexible and frequently revisited.
Patane's agreements take on even more flexibility by containing opt-out provisions. "I can give Rozanna 30 days' notice," says Doria, "saying, for example, that the agreement no longer works for me. The reason this flexibility works is that we all understand each other's goals and the fact that the agreement is only temporary. It could run three or five years, but not forever because Rozanna will eventually sell or retire."
"My plan is to cut back at some point, so I'm working 30 hours like Faye," says Patane. "Maybe that will be after my daughter is out of college."
One event that confirms for her that the agreements she made will work for her and her clients when needed came when Patane recently threw a Sunday morning breakfast for about 40 clients. "We didn't have an agenda. They just came to celebrate my having been in business a long time. Jill came too, and I introduced her [as a possible successor]. I got great feedback from many who were there about how much they appreciated my putting a succession plan into place and how happy they were to meet Jill."
Is what Patane ended up with a full-fledged succession plan? Yes and no. To Patane, it's a comprehensive plan because it meets her particular need, which is to protect her clients and her practice for another couple of years until she retires or cuts back. To other advisors, it might appear somewhat limited. However, we must consider each business as unique, and therefore deserving of a unique agreement. From that standpoint, Patane has done her job.
An independent advisor since 1981 and journalistic voice since 1993, David J. Drucker, MBA, CFP® is a frequent speaker at industry events. To learn more about his availability for your next event, contact him through www.DavidDrucker.com.