PASSING THE TORCH. How to plan for a successful succession

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1 PASSING THE TORCH How to plan for a successful succession

2 KEY TAKEAWAYS Having a succession plan in place is vital to the ongoing success and potentially to the near-term growth of your practice. You can t ensure that your family, staff and clients will be supported in the way you intend without one. When it comes to the structure of your succession plan, an array of options exists; however, the one you choose will be largely determined by your advisor status and by who you d like to see succeed you. Identifying, grooming or simply choosing a successor is the lynchpin of your succession plan. Successors typically fall into one of four categories: family member, trusted colleague, external partner or external buyer. The timing of your succession plan is also a key to its success. While some conventional wisdom calls for a five-year implementation process, many experts believe identifying and integrating a suitable successor, successfully transferring your client relationships and handling all the related logistics can take even longer. BUILDING THE PLAN OF YOUR CAREER As a financial advisor, you ve spent an entire career helping countless clients plan for their lifelong goals. But how much time have you spent planning for your personal goals For when you ll fully or partially retire? To whom you ll pass ownership of your business? For how you ll help your family, your colleagues and your clients make the transition? If you re like many of your peers, you ve probably spent far less time than you should. According to a recent survey conducted by Investment News, just 30% of financial advisors reported having a succession plan in place. Maybe that s because they think of succession planning as an end-of-career exercise that can be postponed until they have the time or need. But ask yourself this, would you ever tell your clients to hold off on planning for retirement, discussing their estate plans or simply planning for the unexpected? No, you would encourage them to develop a thorough plan as early as possible. You should do the same for yourself and for your business. One of the most important things you ll ever do for your practice for your family, for your clients and for your colleagues is plan for how you ll pass it on. Developing an internal succession strategy can increase morale, productivity and loyalty to your practice. In addition, it can be a great way to attract new talent, which is instrumental to a long-term succession plan and a boon for continued growth of your business. It can also enable you to maintain control of your business while gradually selling or transferring ownership to key employees or a fellow advisor over time. Any good succession plan hinges on answering four simple, but often far-reaching, questions: WHY? HOW? WHO? WHEN? With this white paper, we ll help you explore each of these questions and set you on the path to developing your own successful succession plan. 1

3 ASKING WHY The question of why to plan for your succession might seem to have an obvious answer. Retirement is a key element of most advisors businesses, after all, and it might have more personal resonance for them now than ever before. The average age of today s financial advisor is just shy of 49, according to Cerulli Associates, and 14% of that group is north of 60. So, it s no surprise that complete or partial retirement is a primary driver for many advisors as they begin to think about succession. But even though because I want to retire is an excellent reason, it s really just one of many and some reasons are often even more important. REASONS TO PLAN For your future For your family For your clients For your partners and staff For the next generations For expected milestones For unexpected events For the growth of your practice For the long-term legacy of the business you built A sound succession plan should consider and account for all of these reasons, but one is frequently overlooked. Many advisors only think of succession planning in terms of its ultimate outcome and rarely see it for its ability to help them grow their businesses in the near term. Beyond outlining a strategy for the eventual retirement of the founding owner(s), succession plans can also serve as road maps for expanding businesses and grooming talent. Alongside your own exit strategy, you can create a career development plan for your top associates, defining the roles they ll play and the value they ll add in the years and months preceding a succession. 2

4 DETERMINING HOW When it comes to the how of succession, your structuring options are various and varied. The foremost factor in how you ll choose among them depends on the limitations you may have in transferring full ownership of your client relationships. In many situations, this comes down to one question: Are you an employee advisor or an independent advisor? Many employee advisors leave succession planning up to their broker/dealers and transfer their books of business to another advisor in the same branch office, according to their employment agreement. However, other employee advisors may have more flexibility with their client relationships at retirement and enter into buy/sell agreements with their firms. Sometimes these agreements can be established years in advance of a projected retirement date. These types of buy/sell arrangements provide continuity for clients and staff, and allow for an array of compensation options. For instance, employee advisors at Raymond James typically structure their agreements in one of four ways: 1 A purchasing financial advisor or team is identified and agreed upon by the departing financial advisor, his or her branch manager, and the firm. The purchasing advisor is then charged with providing service to the departing advisor s client base in order to pay Raymond James back for funding the payment to the departing advisor for the client relationships at the negotiated sales price. Once the payments are made, ownership of the client relationships is transferred to the successor. 2 The firm agrees to lend a purchasing financial advisor funds via a promissory note to purchase a departing financial advisor s book. 3 A purchasing financial advisor agrees to pay the departing financial advisor a percentage of commissions or a fixed amount out of revenues generated on the departing advisor s client relationships until an agreed-upon total purchase price has been paid to the selling advisor. 4 A purchasing financial advisor agrees to pay the departing financial advisor a negotiated amount with no financing provided by Raymond James. 3

5 Independent advisors, as owners of their businesses, have complete control over their succession plans. They can choose their successors as well as how and when ownership transfer will occur. This flexibility makes it possible to structure a succession plan that maximizes benefits and minimizes the impact of taxes on the sale proceeds. And, because the advisor owns the practice, he or she can expect to receive a fair market value for it. In fact, many employee advisors elect to transfer to an independent platform just prior to retirement in order to freely choose successors and realize the tax benefits of a transfer or sale. However, with this flexibility and personal control over the ownership succession plan process comes a great deal more responsibility for the plan s successful implementation. The succession planning process for independent advisors typically encompasses three major phases: 1 Practice Benchmarking and Market Valuation Determining the how begins with evaluating how much, so before an owner approaches prospective buyers it s important to understand what his or her practice is worth. Determining a reasonable market value is certainly a job an independent advisor can undertake without professional help, but as practices have grown increasingly complex so has the challenge of properly valuing them. So, if an advisor s broker/dealer does not provide valuation services, it may be wise to engage an independent entity to help with valuation of the financial planning or investment advisory business. 2 Short-Term (Catastrophe and Contingency) Planning To protect any independent business and preserve value for the owners in the event of death or disability, an independent advisor should, at the very least, establish an agreement with another qualified financial advisor who may or may not be a long-term ownership successor as someone who would take over client relationships and compensate the advisor s spouse and heirs in the event of accidental death or full disability. Without a written plan, the full value of an independent practice will almost never be realized by the owner or his or her beneficiaries. 3 Long-Term Succession Planning With steps one and two complete, an independent advisor would still need to create a plan for the methodical and planned transfer of ownership prior to a planned retirement and sale of the practice. 4

6 IDENTIFYING WHO If you re in a position to select a successor, the task of selecting the right individual is a significant challenge, both professionally and personally. Depending on your situation, this could be your opportunity to watch a child come into his or her own in this profession, or it may be a reward for a longtime employee who invested years in helping build the practice. But even if it involves passing ownership to a willing buyer with whom there isn t a long-term relationship, this decision is the lynchpin of your succession plan. You might decide to: Transfer or sell ownership to a family member Transfer or sell ownership to a trusted colleague Merge a practice with a new partner Sell to an external buyer These four approaches are by no means the only choices available to you, but most advisors find one or more of these strategies suit their circumstances. In making a decision on a succession strategy, it is important that you carefully weigh the benefits and drawbacks of each alternative. FAMILY MEMBER BENEFITS Beyond building a business continuity plan, you re creating a family legacy. Clients often favor the family succession approach because of the continuity and business legacy associated with this approach. Clients get to know the family member successor well in advance of the ownership transition, and consequently, relationship retention is among the highest of all succession methods. You ll have the flexibility to pursue multiple ownership transfer options including gifting ownership, utilizing trusts, outright sale or a private annuity sale. DRAWBACKS If handled improperly, having one family member become the business successor may cause friction with others. It may be difficult to keep business and emotion separate, and consequently, poor decisions might be made out of sympathy or a sense of obligation. 5

7 TRUSTED COLLEAGUE BENEFITS By passing ownership to a younger advisor you ve groomed for succession, you can ensure that your practice s culture and standard of service won t falter. Much like passing to a family member, this option helps to ensure the comfort and confidence of your clients and the retention of those relationships. DRAWBACKS In some situations, a younger associate may encounter challenges funding the buyout. If a suitable candidate isn t already working in the practice, it can take significant time to identify and successfully retain one. EXTERNAL PARTNER BENEFITS For a solo advisor with no desire to seek out and affiliate a junior partner as the future owner of the practice, another independent advisor in the same geographic area may agree to enter into a working (versus legal) partnership despite maintaining separate practices with the expectation that each working partner will be the ownership successor for the other advisor without consolidating the practices prior to the ownership transfer. You can establish a revocable trial agreement to test out the relationship before there is any formal agreement for the transfer of ownership. Neither advisor incurs any operating expenses nor makes changes in his or her practice with this type of plan. DRAWBACKS Finding the right working partner may prove difficult if not impossible in some geographic areas. Partners may disagree and find themselves making certain concessions about the value of their practices. 6

8 EXTERNAL BUYER BENEFITS Generally requires a relatively short transition period for the selling advisor. Due to the transactional nature of these arrangements, this option may take less of an emotional toll on a selling advisor. DRAWBACKS While due diligence is an important part of any succession or acquisition, it is especially complex when selling to a party affiliated with a different broker/dealer due to client privacy regulations. Less than complete disclosure about all client relationships may also result in a lower price. With this type of sale, you may not be able to secure continued employment for your staff with the purchasing advisor, and it is less likely that all of your clients will be retained by the purchaser. SEEK HELP Many broker/dealers have systems and services in place to help you through the succession planning process, so be sure to check into the resources already available to you. For instance, advisors at Raymond James receive assistance with valuating their practices and locating and screening potential successors or buyers. This option often requires more expert legal and tax advice on the various implications and proposed terms of the purchase. DECIDING WHEN They say timing is everything, and when it comes to succession planning, they ve never been more right. Choosing when to begin implementing your succession plan and transferring ownership of your practice can be as important as developing the plan in the first place which is why it should be part of your planning process from the outset. Even if you re not sure of an exact date or even year you plan to exit the business, take your best guess. It s much easier to simply delay implementing a plan than to attempt to create one when you re finally ready to step down. While conventional wisdom sets the ownership transfer starting line about five years out from your exit date, most experts recommend allowing even more time. For every year you wait, you lose a little bit more control over the eventual outcome of your plan and potentially risk a diminished market value. Each of these elements of a well-designed succession plan might take more than five years to complete: Gifting business interests to family members before the sale Accumulating personal cash and assets outside the business Hiring or developing a successor Adjusting timing of a sale based on market or industry conditions So, it s best to begin with the end in mind. Establish a possible retirement date and ensure your succession plan is structured with that end in mind, even if you end up delaying it. 7

9 PLANNING IS THE KEY TO A SUCCESSFUL SUCCESSION Even if your time frame for retirement is less than five years away, it s never too late to start creating a succession plan and it s certainly never too early. As a professional financial advisor, you have an advantage when it comes to building a business strategy that is both technically sound and personally rewarding. Nevertheless, most financial advisors will still find it helpful to take advantage of the succession planning resources or programs their broker/dealers have to offer. It also can prove valuable to engage an outside consultant with expertise in succession planning for professional practices or to simply reach out to friends and colleagues who ve gone down this road before you. When it comes to passing the professional torch, you have a lot to consider. But taking the time to consider it is your first step toward success. CONSIDER What is your timeline? Is the plan you have in mind consistent with the culture and history of your clients? Have you benchmarked your practice to find strengths and weaknesses and determined a reasonable market value? Is your practice structured with standardized procedures and processes that enable it to survive without you and to create minimal disruption to your clients? Will the proceeds from the transfer of ownership along with your other assets last through retirement? How will your clients react to your plan? What plan do you have for your staff? Have you informed your broker/dealer of your plan? What financial terms are you seeking if selling to a third-party purchaser? What is the profile of the best-suited internal or external succession candidate? Are your expectations realistic? For more information, contact Raymond James Practice Planning and Acquisitions at or 8

10 INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER 880 CARILLON PARKWAY // ST. PETERSBURG, FL // ADVISORCHOICE.COM NOT FOR CLIENT USE 2012 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2012 Raymond James Financial Services, Inc., member FINRA/SIPC 11-PCGAC-0254 JD/CW 3/12

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