I think most of us would agree over the past three months we have all come to expect the unexpected. In our September 2019 Legal Risk Management Tip, we discussed the importance for smaller financial industry firms to consider succession planning. Recent events have shown just how drastically firms can be impacted by unforeseen events. No matter the size of the business, all financial industry firms must be prepared if the senior management team was suddenly to become unavailable – whether due to illness or another an unforeseen event. Moreover, if and when the need arises, the timing and the economics of selling a business can be significantly impacted if not properly planned.
Having an effective succession plan in place is critical. This month, we explore succession planning for advisers looking toward retirement and transitioning their business, which for some, can be a five- to ten-year process. It is best to prepare for the unexpected, and not put off planning for your business’ next generation.
Why a Succession Plan?
In addition to the regulatory requirements for some, succession planning is critical from a client servicing and business transition perspective. Clients want to know that their assets are going to be taken care of both today by your current team and in the future by professionals who share your philosophy. When you present clients with your succession plan, it instills added trust, security and confidence in you and your firm. Conversely, if current or potential investors ask about your “what if” scenario and nothing has been implemented, it damages your credibility and could result in the client engaging or moving to a different firm. This becomes of greater importance as the adviser ages; advisers nearing retirement with no plan in place can be especially vulnerable.
As an advisor moves toward retirement, consider whether you want your firm to continue as-is, or would you rather sell your “book” of clients to another adviser or firm. If you want your firm to continue, you need to find the right successor – an individual or group of individuals who will assume your responsibilities running the firm. A determinative factor in how your business will run after you leave depends on who you leave in control. While selecting a successor can be the most challenging aspect of developing your succession plan, it is arguably the most important.
Choosing a Successor
When developing your succession plan, you must identify a professional with similar skills to continue similar servicing efforts for your clients. Typically, successors are identified in one of the following groups.
- Existing Business Partner
Members of your executive team who have an interest in the company are perhaps the most common and simplest scenario. The retiring member (or the member’s agent or representative) can simply sell his or her interest in the business to another existing business partner. This allows continuity in management and is least likely to raise client concerns.
For advisers who are sole owners of their business, perhaps the dream is to keep the firm’s business in the family and pass it off to children or sibling(s). This strategy can be very rewarding from a personal standpoint. Unfortunately, there is not always a family member who is qualified or experienced enough to take over the business. If willing, the retiring or departing member’s kin could undertake the process of licensing and learning the business far in advance, so that when the time comes for succession, the firm can be easily transitioned to the family member.
Some advisers may have a promising associate to whom they wish to leave the business. This is another strong option for ensuring that clients are likely to be more comfortable and the transition will go smoothly. However, often at times a single employee does not have the financial means to buy out the seller’s interest (particularly if there is a high valuation of the seller’s interest). In that instance, often a “team” of employees could become the successors.
- Outside Buyer
The last option is to find an outside buyer. Likely, the candidate will share a similar investment and client servicing philosophy. This will generally take the longest to successfully complete because the successor is completely new to your clientele and will need to earn their trust. Strategic planning is a must.
The relationships of trust you built over years or even decades with clients makes it important that the common values on which those relationships are built are shared by the successor. It is important to properly vet and get to know your successor to ensure your clients will receive the same brand of service that you have been providing throughout your relationship.
Once your successor has been identified, it is essential to effectively communicate the impending transition with your clients to instill confidence in the successor you have selected and warmly introduce the successor to all clients so that he or she may develop a relationship with their new advisor. If you have the ability to coordinate an in-person introduction for each client with the successor that is always best. If that is not feasible, a telephonic or video introduction can be sufficient.
One thing that cannot be understated is the importance of memorializing your succession agreement in a written contract. No matter how much trust you have in your successor, unforeseen circumstances can always occur and undermine the entire succession arrangement. Be sure to memorialize the most important terms in a plan, including material areas such as the methodology or formula to be used for valuation of the business, payment terms, the anticipated timeline of the transition and benchmarks for exiting. Having this in place will help to maintain peace of mind throughout the process and beyond.
Remember that creating a succession plan and grooming a successor are not overnight undertakings. Fastidious strategic planning and tutelage must be put in place to ensure the future of your business has clear direction and capable leadership for servicing clients into the next generation. Most importantly, the retiree will be able to more readily relax and have peace of mind knowing that the firm’s clients remain in good hands.
Authors: Michelle L. Jacko, Managing Partner of Jacko Law Group, PC (“JLG”). JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.
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 See https://www.investopedia.com/articles/financial-advisors/022516/advisors-falling-short-succession-planning.asp
 Although the North American Securities Administrators Association (NASAA) model rule for succession planning has not been adopted, some states, such as Michigan and Virginia, require a succession plan for RIAs.