From the February 2008 issue of Research Magazine • Subscribe!

A Plan for the Planners

Succession planning has never been at the top of most advisors' hit lists. As Tim Edwards, a principal with Prospera Financial, puts it: "It's one of those things like buying life insurance. 'Yes, I need it. But I'm not going to die today. So I'll buy it tomorrow.'" In the independent broker-dealer arena, at least, tomorrow has arrived.

Over the last 18 months, broker-dealers -- large, medium and, like Prospera, small -- have become pro-active, even aggressive, about helping their advisors design succession and continuity plans.

One bellwether: A year and a half ago, FP Transitions, the Portland, Ore.-based succession and acquisition consulting firm, had just a handful of relationships with independent broker-dealers. Today, it serves 70 percent of the top 50 firms in the country -- and many of the smaller ones. "We didn't go to them, they came to us," says David Grau Jr., FP's corporate programs director. "You could almost watch the trend at work."

The trend is being pushed by twin drivers: aging and successful advisors who want to extract the maximum value from their businesses when they exit, and broker-dealers that want to see assets and clients stay put when the advisor moves on.

Just consider some of the initiatives on board for 2008. Texas-based Prospera, with 100 advisors, has made it mandatory for new reps to have a succession plan in place within six months -- and all advisors must have one on file by the end of the year. National Planning Holdings, whose four broker-dealers have a network of 3,000 advisors, has just launched an acquisition loan program to help reps with transactions.

Todd Kinart, president and CEO of National Planning Holdings broker-dealer SII Investments in Appleton, Wis., says: "This is something that will become very popular in the future. This is a non-traditional way of recruiting and growing."

Wachovia Securities Financial Network a few weeks ago hosted its first-ever succession planning workshop with FP Transitions for the top quintile of its 323 practices. In all, over 60 business owners participated. "I would say the vast majority [had] done nothing on the topic," observes John Peluso, the group's CEO. Depending on the feedback he gets, Peluso will extend the offering to other advisors.

Meanwhile, Commonwealth Financial Network hopes to double to 450 the number of continuity agreements it has on record. The MetLife Broker Dealer Group, representing Walnut Street Securities and Tower Square Securities, last summer formed a special projects committee of its rep advisory board to make sure its organizational structure is succession plan-friendly. At the moment, the committee is reconfiguring the firm's rep agreement to make sure it is what president Craig Markham calls "friendly and flexible" in accommodating various succession arrangements. And LPL, with over 10,000 advisors, has set its sight this year on the person least likely to have a continuity plan: the sole practitioner.

"More and more broker-dealers are getting to actionable steps. How do we get those numbers up? How do we make the advisor get this done? How do we help them get this done? That's the big change," says Grau. "It's a team effort now."

By The NumbersSuccession planning typically starts with a number: a valuation of the business. Basically, it's the value of the business at a given point in time. More important than the number, experts say, are the strategies an advisor can employ to increase the number and improve equity. If the push to plan has done nothing else, it's created this new buzzword: equity management.

"In workshops, it's the main topic: equity management. I think people have started to acknowledge that equity management isn't about buying and selling anymore. Today, it's all about building the addition, improving the value of the house," notes Grau, whose firm is in the process of creating hundreds of succession plans for advisors. "There's no way to appreciate and protect what you've got if you don't know what it's worth. If you get a number in front of them, advisors will take steps to protect it."

But before advisors get to that sweet spot, they are going to have to overcome this nasty math: Only 15 percent of independent reps have written succession plans even though a full third plan to retire in the next five to 14 years, according to research from Tiburon Strategic Advisors.

"This is a topic that carries great weight. One of the drivers for going independent is to build equity in your business. Building equity, in and of itself, and not having a plan to extract the equity out of the business at some point in the future really isn't worth a whole lot, is it?" observes Peluso.

However, Peluso at group meetings and during his travels to branches, says succession planning has emerged as a dominant topic. And not as a short-term exit strategy but as a profitability and productivity builder. Among the top questions he is fielding: How do I get started? What are the steps? How do I create a plan to capture the equity in my business?

At Pershing, which provides support to 850 independent broker-dealers, management this year will roll out what Susan Theder, director of segment marketing, describes as a "robust" offering of retention and development and succession planning tools and programs.

At press time, Pershing had not yet announced the content of the programming, but Theder said it would directly address concerns she is hearing from advisors in the field. "At every top producer conference I've been to in the last few months, management gets up at the end to talk about top concerns. At every single conference, continuity or succession planning was the top or second concern," she said. "Two years ago, I don't know if I heard it as loudly."

Theder and others also believe that the push to help advisors with succession will serve as a huge retention tool.

"I think we're on the cusp of seeing a lot of people starting to get into this space. This is one of the ways you can differentiate yourself and compete with wirehouses. A succession plan is more meaningful and longer lasting than just a signing bonus," she adds. "We're going to be focusing a lot of effort on this; it's not a concern that's a fleeting one."

Some firms are even creating internal teams to help advisors broker transactions. LPL, Raymond James Financial Services, Ameriprise and Commonwealth all have people on the ground. As John Leonetti, whose firm Pinnacle Equity Solutions helps advisors build exit strategies, notes: "Basically, they're creating a market within their own broker-dealer network."

LPL, for example, has a succession planning group to help create and implement plans and 18 months ago it instituted a relationship management team to assist top-producing advisors on a higher-touch basis. In 2007, according to Brad Fryer, executive vice president of business development, the firm helped facilitate roughly 40 transactions, all of them from one LPL branch office to another.

Last year, Commonwealth, with over 1,000 advisors, hired an in-house consultant who spends half his time on succession planning.

"Ultimately, it's about the 100 operational details. When advisors get close to that moment of implementation, we invite the buyer and seller to an operations committee meeting and we walk through exactly what is going to happen and when," says Joni Youngwirth, vice president of practice management. "What I find huge is when the buyer and seller are there together and they hear it at the same time. There are no surprises, and that's a huge contribution."

An Industry SnapshotSome of the smaller broker-dealers have been early adopters -- perhaps because they have so much to lose when an advisor switches corporate allegiance.

Dallas-based Prospera Financial, formed 17 years ago, has 100 advisors. The firm had already made succession planning a priority, but when a young advisor died of an aneurism while on vacation last year, it drove its importance home.

"He was a planner. He did a lot of planning for his clients and he took care of his family, but he did not have a continuity plan in place," says Tim Edwards, one of three owner-principals. "Fortunately, we were able to plug in one of our people in his hometown, but you're not always in a position to do that."

In November, at Prospera's annual national conference, FP Transitions conducted a succession planning workshop for the firm's 20 top producers. As Grau puts it: "They took those 20 advisors and said: 'No more talking about it -- we're going to pay for it and you're going to walk out of this room with a continuity plan.'"

Today, Edwards says close to 30 percent of the firm's advisors have a plan. Even that number, high for the industry, fails to satisfy him, however. "Everybody sees the importance and the need for it, but they're slower in executing and implementing than I'd like," he adds. "I'd like to see a lot more penetration than we have."

The existence of a continuity plan will become a requirement at Prospera by the end of this year. Notably, Edwards and his two partners just last fall designed a continuity plan for their own individual practices; they already had a buy-sell agreement in place for the firm itself.

"Whether they want to utilize the services we provide or go out on their own, we really don't care," he said. "What we care about is that they have a plan in place and that they've communicated it to us. This is an issue that's only going to get bigger and bigger as advisors continue to age. We need a plan for tomorrow, and unfortunately a lot of us don't practice what we preach. We will continue to encourage and offer up these services until the job gets done. Hopefully, we can make a difference."

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Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at ellenuzelac@msn.com.

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