Advisors: Who Owns Your Business When You Die Or Retire?

Business succession planning forces financial professionals to consider ways to sell their rights to their lucrative trail and advisory fee commissions to broker/dealers or even to bequeath those rights to spouses and children.

Many of these professionals have moved into the asset preservation business, so they have built up a respectable flow of recurring residual revenue. Now, as they contemplate retirement, they want to pass this on. But in order to do so, they must deal with several unpleasant facts. These include:

The professionals own death (something no one can time, unless its Dr. Kervorkian);

The professionals own disability; and

The fact that a practice that produces a good income may not always have a substantial long-term value.

A further complication is the regulatory environment and the third parties involved: custodians, insurance companies, and broker/dealers.

At stake is control of billions of dollars in annual payouts–some $6.8 billion in mutual fund 12(b) 1 fees alone last year, according to Lipper Inc. So, professionals do need to address the issues.

To start the process, here are some questions and answers on key factors:

1) What happens to my securities clients upon my death, disability or retirement?

Most broker/dealers will assign your clients to regional directors for handling on a case-by-case basis. Most broker/dealers have a direct obligation to take care of the client upon death of a rep, to safeguard the clients mutual funds and securities.

The National Association of Securities Dealers, through Rule IM-2420-2 (Continuing Commissions Policy), offers an exception to paying 12(b) 1, advisory fees or other transaction-based compensation to a non-registered entity. Because of this, commissions can be paid to an advisors widow or beneficiary, as long as a bona fide contract exists while the rep was registered.

In particular, the Rule recognizes the validity of contracts that vest in the registered rep and his heirs right to receive continuing compensation upon retirement. The rep can designate such payments to the surviving spouse or other beneficiaries.

Retired financial advisors who are no longer registered (or their unregistered widows or other beneficiaries) can continue to receive what are meant to be “service fees,” under the NASD rule, so long as the advisor specifies the details in a contract while still registered and active. But in no event can a non-registered rep receive compensation on new sales activity.

This rule has existed for years, but it has more importance now that more and more financial professionals are transitioning from commission-based practices to fee-based practices.

2) Does your broker/dealer offer any help in dealing with the issue of succession planning options? If so, what are the requirements?

Many broker/dealers use former representative or advisor accounts to recruit new representatives or reward star producers, while others assign them as house accounts. The latter approach leaves the heirs of the former advisors with no remaining split on ongoing advisory or trail commissions.

Meanwhile, few broker/dealers offer any assistance with the issue of succession planning options or requirements. For instance, it appears that most independent and full service firms and discount brokerage houses do very little to help advisors retain the value of their practice and what they have worked so hard to create. And most big wirehouse brokerage firms decline to comment on business succession.

3) Do you have a buy-sell agreement in place with your broker/dealer? What is your business worth?

A $100 million book of agency business might annually gross $1 million at 1%. Subtract $150,000 for replacing the owner with a paid employee and another $200,000 overhead and you are looking at operating income of $650,000. Taxes after deductions might be $250,000, so you have a $400,000 net.

That might mean the agency practice is worth approximately $2 to $3 million. But that will not be the case if your broker/dealer absorbs your clients and their assets.

4) As it relates to business succession, does it matter if you use an independent advisor affiliated with your broker/dealer, drop your securities licenses and operate as your own registered investment advisor, or do business under an RIA owned by your broker/dealer?

Under the Investment Advisers Act of 1940, an advisory contract with a client cannot be reassigned without the clients consent; but client agreements dont have to be re-executed. In practical terms this means that, unless a buy-sell agreement is in place, custodian firms are going to worry about their liability if they dont inform the clients on an advisors death.

If you are a registered rep working through an RIA owned by your broker/dealer, you can work out a cross-purchase agreement for this. But you as rep must be associated with the broker/dealer.

No consent is needed from clients to shift the accounts to another servicing representative as long as the RIA remains unchanged. However, the Securities and Exchange Commission requires that the change be disclosed to clients.

Over the coming years many financial professionals will be looking to retire or sell their practices.

The best way to find someone who can take over when you retire, die or become disabled is to groom your successor. When you retire or die prematurely, a trusted partner can pay you or your beneficiaries an ongoing monthly stream, ensuring continuity for your clients and providing value for your loved ones.

It is inevitable we will all die, and many will become disabled before planning an orderly departure from the practice. All financial advisors owe it to their clients, employees and family to make adequate succession plans. Why wait until youre three cars behind the flowers?

Richard H. Ford is senior vice president-business development for PlanMember Securities Corporation, a registered broker/dealer and investment advisor, in Carpenteria, Calif. He can be e-mailed at richardf@planmember.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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