If you are an older advisor approaching retirement age and you have not discussed your plans with clients, chances are they are wondering what will happen if something occurs and you are unable to carry on.
It’s a difficult situation that clients sometimes have to deal with, said Todd Doherty, an M&A expert with Advisor Legacy, an M&A firm that focuses primarily on businesses in the financial services industry. Services include acquisition consulting, business valuations, and legal and lending support.
Doherty noted that he has been involved in selling a number of practices due to death and disability of advisors who did not have a continuity plan in place. “Probably more than I’d liked to remember,” he said, adding that these cases are always difficult and sometimes tragic.
Doherty, along with Anthony Whitbeck, CEO of Advisor Legacy, and Adam Farag vice president of strategic markets, Oak Street Funding, presented a webinar last week titled Creating A Successful Continuity Plan. Oak Street Funding partners with Advisory Legacy Services to provide loans for acquisitions.
“What we found is that just like the cobbler’s kids have no shoes, we find the same thing in the financial services industry that a lot of the advisors did not have a continuity or succession plan” said Whitbeck. “And yet they help their own clients prepare for the unplanned events … It’s ironic but it’s the case."
Whitbeck explained that unlike a succession plan, where an advisor begins to develop the next generation for his practice typically five years before retiring, a continuity plan is to protect the value of the practice in the event of death or disability.
He noted that only 18% of financial advisors have a continuity plan in place and of those, 59% do not have a successor for their practice. The numbers also are alarming for those who have created a formal succession plan. A 2018 study by the Financial Planning Association found that 73% of advisors, many aging out of the business, did not have a written succession plan, and 60% of those within five years of retirement did not have a plan in place. It further found that 48% of those five to 10 years away from retirement lacked a plan.
Not having a continuity plan hinders growth but it also is costly, Whitbeck said. He noted that there is less likelihood that the staff would be retained; clients are less likely to stick around because of the long transition period and the uncertainty of what to expect in the event the head of the practice dies or becomes disabled. He also pointed out that with a plan in place, it’s more likely that the successor will have a similar personality and be a better fit for the clients.
Further, he said you want to avoid a FIRE sale where the price is extremely discounted. “It’s a good chance that a buyer is going to pay less for it … if you were to sell it on the open market after the person has deceased or become disabled,” he said.
When putting together a continuity plan, Doherty said there are four simple questions that needs to be addressed. The advisors should ask himself: Do I know what would happen to my practice in the event of death or disability? Who is my point person? Do my family, staff, clients know my plan? Would people be able to find my stuff/documents?
A good continuity plan, Doherty explained, protects the key business relationships that the advisor has with clients and staff, protects the equity in the practice and it protects the family and estate in the event of death or disability.