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Succession Planning: You've Got To Have A Plan

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While a financial planning practice is a business, it’s more akin to a doctor’s office than a shoe store. Medical practitioners invariably have backup plans–other doctors available to handle patient needs if the primary care physician is unavailable whether for a weekend or forever. Advisors should have similar arrangements, but unfortunately not all do.

The previous articles in this special section contain advice from experts, and what the data can teach, on succession planning. There’s also much that can be learned from the experiences of other advisors who have dealt with the issue.

Here are five case studies of advisors who have prepared a succession plan, each in their own way, to meet their different needs and those of their practices.

Case Study No. 1: Looking for the Right Answer

When he first launched his practice–J.M. Egan Wealth Management in Madison, New Jersey–15 years ago, John Egan’s plan in the case of his untimely death was to have enough life insurance to see that his family was taken care of. “Then I realized that’s not really the right way to do it because my business does have value and also, what do I do with the 500 families that I’m trying to help?” he asks.

“And then a client asked me the ‘What if?’ question,” Egan recalls. “He said, ‘You’re great and we’d like to do business with you, but what if something happens to you, what happens to us?’ I didn’t have a good answer.”

Recalling that moment, Egan compares himself to a house painter whose own home needs a fresh coat–he was making long-range plans for others, but hadn’t made one for his own business.

A 49-year-old who has been in the business since he graduated from college, Egan took several steps to see that his clients would be looked after and his family would receive the value of the business he had created, which in addition to the firm itself includes the building where it’s located.

One thing he’s done is to place the majority of his clients’ assets under his own RIA rather than that of his broker/dealer, making it easier those assets upon death. About a year ago, after what he calls “probably too much research” he joined Securities America because that independent B/D would allow him to use his own RIA. The B/D also has a staff person solely dedicated to helping advisors with succession planning. Through Securities America Egan has signed on with FP Transitions to help him determine the value of his practice.

Five years ago, Egan hired another financial planner, Janet Sherry. “She’s a CFP who I always say is a lot nicer and a lot smarter than me,” quips Egan.

He’s also written a buy/sell agreement and gone over it with his family and with his own advisors–his attorney and CPA–so that they understand, in the event of his own death or disability, his plans for the business. Part of the buy/sell agreement would allow Sherry, who currently sees about half the firm’s clients, to purchase it at a deep discount with financing provided by an insurance policy on Egan.

That’s the plan Egan’s devised in the event of an untimely death. Retirement is another matter altogether. “My goal for the next 15 years isn’t to try to make my business valuable to sell it. I hear a lot of people say that and that’s all they worry about instead of worrying about their clients. I have a responsibility to have the firm be here if something happened to me.”

Egan reveals that his mother taught kindergarten until she was 76 years old and that he could see himself working three days a week until he’s 70.

And even though he sees full retirement some 20 years into the future, it has entered into Egan’s plans. He doesn’t anticipate Sherry buying the practice when he retires, because she’s older than he is. So he’s gotten the names of a number of firms who might be interested in buying the practice from his B/D. He also has college-age children who, although they’re both majoring in communications, might at some point take an interest in the business.

“It’s like a financial plan,” Egan philosophizes. “Proper succession planning for a business like ours is an ongoing process too.”

Case Study No. 2: Plans Don’t Always Work Out

Just because you’ve worked out a succession plan, it doesn’t mean it will play out like you imagine, as Ed Mallon of Secure Planning, headquartered in Portsmouth, New Hampshire, with offices in Denver and Woburn, Massachusetts, can attest.

A Denver office had been affiliated with Secure Planning for years, but the individual who ran it had his own book of business. The practitioner in Denver had started out as an accounting business and Mallon agreed to provide him with back-office services and compliance in return for a small percentage of his gross.

Eventually the other individual hit age 70 and decided to sell his book. He and Mallon negotiated a price, which Mallon describes as “pretty much in line with most of the guidelines that you read about: about 2.75 times the gross of revenues on the assets under management.”

The deal called for Mallon to pay the other planner a salary during a two- to three-year transition period as well as to pay the negotiated price for the business over six years.

“Unfortunately it didn’t work out that way,” recalls Mallon. The other planner died in November 2004, about a year after they signed their agreement, and Mallon had to dive in head first to make sure his clients in both Portsmouth and Denver were taken care of.

Currently Mallon has a client service rep and an administrator in Denver and spends about four days a month there himself.

Mallon has also made arrangements for his own succession. “I have a buy/sell agreement with one of the people who works with me,” he reveals. “She’s my right-hand person, Lisa Dugan. This is one of the things I couldn’t do with [the Denver practitioner] because he had a pretty serious heart ailment: We’ve taken out a large life insurance policy on my life so that if I die she can buy the business from my estate. If I should live, which I certainly hope, she will start doing what I did and buy me out over a six-year period.”

Case Study No 3: Breaking Up

For Randy Bateman, having a workable succession plan meant dissolving a 30-year partnership. Having started in the business in 1979 and been a CFP since 1984, Bateman turns 62 this month, the same age as his two previous partners in BCA Financial Services in Hillsboro, Oregon. Bateman is merging his practice with that of Mark Martel, a younger (50) advisor with a much larger practice; the plan is that Bateman will eventually buy him out.

Bateman still keeps a part-time office in the space he shared with his former partners and also has an office suite at home, where his wife remains his administrative aide, but when clients call the phone rings at the offices of Martel Wealth Advisors 30 miles away in Vancouver, Washington. “What I’ve been trying to do is maintain continuity with my existing clients and so many of them have been coming to that office for years,” he explains. “My former partners have been gracious enough to allow me to cut back on my participation to where I just see clients in that office now.”

Bateman and Martel are in the early stages of their relationship and many of the details–such as when Bateman will move into retirement and specifying the monetary value of his practice–still need to be worked out.

Two things of which Bateman is sure? First, his practice isn’t worth what it was two years ago, so like many of this clients he’ll probably have to work longer. Second, he wants to be able to run his business from a warmer locale during the winter months. “I don’t know when I want to completely retire,” he says. “I think it’s at least five years away, depending on how things are working. The merger means I get to focus much more on clients and less and less on administration and the back office. The best part of our business is working with clients. So the arrangement is a little open-ended. Eventually we’ll commit it to paper but we haven’t yet.”

For Martel the merger represents more than just the chance to bring in another 100 clients with $30 million in AUM. “He and his shop are all younger than me. I think what he sees is that ultimately my practice will merge into his, so his book will be larger. I think he also sees some maturity and experience, which I can add to his shop for the next five or six years as we work together. We’ve already started to do that with some of our public presentations,” Bateman explains.

“We have common philosophies about planning and asset management. We are both SEI advisors. Mark and I have the same RIA through our broker/dealer, which is KMS Financial Services out of Seattle. So we have a lot of commonalities and we’ve known each other for over 20 years.”

“I’m looking for a way to maintain my practice and continue to do a good job for my clients, but have more personal freedom and more personal time away from the office.”

Case Study No. 4: Life Goes On

Although Dan Deighan started his firm while still in college (see “Media Star,” IA September 2009) and through his appearances on CNBC and Fox Business is the very public face of Deighan Financial Advisors, he’s set things up so that his clients will be adequately served and his business can continue running smoothly whether or not he’s part of the business.

That’s a proposition he makes clients aware of from the time of their earliest meetings. He explains that in the early stages of the relationship they are likely to see a lot of him, but after that, while he is always available to clients who want to speak to him directly, the day-to-day management of the relationship will be handled by the planner and assistant planner assigned to their account.

“I explain to them that, ‘If I had an accident or got sick or was out for an extended period, you would not necessarily need to change firms, because the people on the team take care of everything, and are qualified to run the firm,’” he says, adding that without the people on the team and the clients there really is no firm.

Deighan is single and has one grown child. At one point she worked with him, but has since moved to southern California. While she would be his heir, he’s working to change the succession structure within the firm and has several key people in line to take over should he no longer be around.

He says he’s not really concerned about how much Deighan Financial Advisors is worth, because he’s not planning to sell and he’s got other assets to leave to his daughter, including the office building where his firm is housed. “She’s going to be just fine if something happens to me and she gets a grand total of zero value for the firm,” he says. “Because it’s structured that way, the people here at the firm will be able to just take over. They don’t have to buy anything. They don’t have to do anything. If they wanted, they could change the name, whatever. I haven’t gotten to the point where I’ve formalized it yet, because I’m not sure that formalizing it is the best thing to do.”

What Deighan says about his own succession plan–”It’s got to be good to go at any possible time”–is also good advice for any advisory firm.