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Forum Panelists Recount Transition Successes And Pitfalls

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Hard work is justly rewarded, or so the saying goes. But as one speaker noted during a general session of the annual forum of the Society of Financial Service Professionals, held here late last month, hard work–and, in particular, a job well done–can have the opposite outcome.

During a panel discussion titled “Business Transition: Acquisition and Exit Strategies,” Jim Soressi, an attorney and second vice president at Guardian Life, New York, cited a situation involving two key employees who were angling to buy a financial service practice from the son of the firm’s deceased principal. Absent a buy-sell agreement with the son, he said, they could have inadvertently driven up the purchase price by boosting the value of the firm through new client acquisitions.

“The key employees were thinking, ‘If we do a bang-up job and increase revenue, we’ll end up paying more for the business,’ ” said Soressi. “ I’ve seen this situation at other practices. The principal who takes over does a great job, then has to pay more to a family member who’s sitting on the sidelines and enjoying the value increase.”

How to avoid such undesirable results and effectuate a smooth transfer of one’s practice took up the better part of the discussion. Among the key issues for several of the panelists was deciding when to transition themselves out of their practices and who to choose as a successor.

For Donald Haas, a financial planner and president of Haas Institute for Wealth & Aging, Birmingham, Mich., the process was eased by a fortuitous call from Mark Davis, a fellow panelist who had approached Haas in the 1990s to inquire whether Haas would serve as his mentor. Haas encouraged Davis to first get additional training and experience at an outside firm, and, some years later, hired Davis as a prot?g? and successor.

“Don helped me reach a plateau in my career probably 10 years earlier than I could have achieved on my own,” said Davis, a chartered financial consultant and vice president of Haas Financial Services Inc., Southfield, Mich. “And I helped Don make more money than he ever expected. We had, by a certain point, almost a father-and-son relationship. We were very close.”

Another who enjoyed a smooth succession was Benjamin Baldwin Jr., a certified financial planner and president of Baldwin Financial Systems Inc., Arlington Height, Ill., who transitioned much of the company’s clientele to his son and daughter. Several years after joining the father’s practice, the two adult children developed their own specialties or “silos,” handling new business while Baldwin increasingly limited his contact to older clients.

“My wife and kids never thought of me as being the boss,” said Baldwin. “At a certain point, I realized that it wasn’t about transitioning my business to them. That wasn’t the dynamic.”

Baldwin’s son, Benjamin Baldwin III, founded in 2003 a separate investment and wealth management firm, Responsive Financial Group, Rolling Meadows, Ill., after purchasing an independent investment advisory firm’s clientele from a then-retiring planner. Baldwin observed that integrating the acquired clients into his fee-only management platform could have been eased had it not been necessary to replace variable life contracts that were incompatible with the platform.

“The [life insurance] product manufacturers need to market to fee-only advisors products that support this kind of a transition,” he said.

Often, the panelists noted, the chief stumbling blocks to establishing a smooth transition are determining a value and structure for the sale of the practice. These issues can complicate the drafting and funding of a buy-sell agreement between parties or call into question a previously established contract.

Richard Weber, president of The Ethical Edge, Emeryville, Calif., observed that 5 years after concluding a life insurance-funded, buy-sell contract to sell his remaining shares of a practice, the buyer, a partner in the firm, insisted on lowering the purchase price.

“There’s one problem with a buy-sell agreement: It requires that both parties adhere what was agreed to,” said Weber. “Yes, business owners need to have an agreement in place, but you may not be able to count on it at a practical level.”

Invoking the example of the two key employees and the deceased advisor’s son, Soressi added that the parties had to resolve several key questions, including: Whether to peg the purchase price to the present value of renewals or, as the key employees insisted, leave the valuation open-ended; whether to sell the firm’s stock or real assets; and, finally, how to secure financing. Soressi said the parties settled these questions and achieved an orderly transfer, thanks in part to the son’s determination to put the clients’ interests first.

Other panelists also noted the importance of communicating with clients about an ownership transfer, preferably well before the sale is completed. They observed, too, that advisors taking control of a practice need to become intimately acquainted with clients’ financial goals. Haas, for example, said he often included Davis in meetings with clients to review their financial plans. And he frequently used these meetings to plug Davis and his expertise.

For Baldwin III, the principal challenge after taking over a retiring advisor’s practice was how to get new clients comfortable with his fee-based service business model.

“You need to have a lot of conversations with clients to help insure they receive the transition in a positive way,” said Baldwin. “While many folks initially perceived the changes as negative or more expensive, I’ve managed to keep 95% of the clients I inherited through ongoing communication.”

Added Weber: “I haven’t found much resistance to being paid a fee to service a policy that another advisor sold on commission. The key is to have a proper dialog about the change.”