From the January 2010 issue of Boomer Market Advisor • Subscribe!

What's your exit plan?

By Eric Schwartz

As a trusted advisor, you deliver comprehensive financial planning advice to your clients, but have you focused on your retirement goals? Who can you turn to for advice and guidance?

About 75 percent of our largest offices are owned by Rep/Advisors who are 50 years old or older. A recent survey of this group indicates that while 80 percent are highly concerned about succession planning; only 15 percent had a plan in place and only half of those plans actually included a funding mechanism for the plan. Therein lies the problem - we know advisors should have succession plans in place but most don't. Why?

The key issues begin with whether an advisor is actually the owner of their business. You can do this by owning your own RIA and/or Broker/Dealer or by being affiliated with a truly independent Broker/Dealer that is supportive of you building equity in your business. In other words, the Broker/Dealers' overall written agreement with you and your clients, and their privacy policy, must provide you the flexibility necessary to buy or sell your practice. Architecture is also an important consideration as a Broker/Dealer with open architecture makes the transition process easier and paves the way for a bigger universe of buyers and more flexible transactions. For example, you may want to buy or sell a practice that is presently at Schwab, Waterhouse, National or Pershing. Your alignment with a Broker/Dealer that can work with any of these platforms will make an acquisition easier and more successful, and add value to any succession plan you want to create.

A second key issue is identifying the appropriate successor. You need someone who will maintain the quality you have established but also someone who has the means to pay you for the equity you have created in your business. Institutions may be able to deliver the money, but most often they destroy the client-centric culture and legacy you have built with professional care and dedication. On the other hand, junior partners can be found that will likely maintain your culture and level of care for clients and staff, but they may have to finance the transaction, resulting in some combination of below-market risk-adjusted valuation, risk of buyer default, and/or limited short term liquidity.

So, how can you get full market value from your successful practice and still hand-pick the best solution for your clients? Your Broker/Dealer should offer well structured succession and acquisition programs that will help you navigate the complex opportunities available to you for your business. If this is not the case, perhaps another Broker/Dealer or consultant can help you.

Any such program must address the issue of a funding mechanism. This can be a big problem given that the funding dollars required are often so large that even large Broker/Dealers cannot afford to back them. For example, values range from one times GDC for a smaller commission practice to two times or higher GDC for a larger fee practice - and this can translate into hundreds of millions of dollars for a Broker/Dealer program. At Cambridge, we have created a fully funded solution for succession plans for 20 of our largest offices. These 20 offices have committed to building with us their own fully funded succession plans. Our next step is to offer this model to all Cambridge offices.

If you are over 50, you are probably worried about how to create a succession plan. Our advice is to get serious and build a plan that works for you - it will be worth the effort. And, if you are under 50 you are facing great opportunities to quickly build your business as many seasoned professionals are seeking the right successor for their valued business. I believe acquisition and succession planning is going to offer some of the greatest opportunities in our industry for the next 15 years.

Eric Schwartz is CEO with Fairfield, Iowa-based Cambridge Investment Research Inc.

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