Securing Value for Your Future

It’s not just a financial advisor mentality; it’s a human mentality. We KNOW life is finite, but we find it difficult to think about our mortality, and along with that comes the avoidance of planning for it. But, as an advisor, isn’t that one of your big pitches? Invest now, plan wisely, and grow wealth for the future. Provide for your heirs when you’re gone. You encourage every one of your clients to not only plan for their future, but to prepare for what comes after. That’s good advice.

Few financial planners, however, take their own advice.

Only about a third of financial advisory professionals have a comprehensive plan in place–and in writing–with clear steps as to what happens in the case of sudden death or disability. This means who steps in immediately to take care of ongoing client relationships and steer the business. This also means protecting the revenue and value of the business.

You Owe it To Your Clients

For clients, unexpected and tragic disruptions like the death or disability of an owner ultimately results initial reactions of shock and sadness, but this is followed closely–and understandably–by the question of what was going to happen next for their own plans and finances. 

The issue of continuity is one that your clients themselves are concerned about. The importance of knowing who will take over their assets isn’t just about your clients knowing there is someone else in the area, but that they can trust this someone else with the stability of their investments.

A formal continuity plan for your business not only protects your business value, operations, and team, it protects your clients. It ensures that management of their assets continues without any gaps or negligence. And it maintains their trust in you and your team.

Levels of Protection

There are varying levels of continuity protections business owners can utilize. But while most advisors try to be perfect, what they really need is to just do something. The bottom line is to get something written in place as soon as you can, and then work to improve and strengthen the plan. The most utilized plans in our industry are revenue-sharing agreements, guardian agreements, and buy-sell agreements. The differences between these three choices are stark and greatly affect the value of your practice should something happen to you. 

Revenue-Sharing Agreement

This plan simply requires that you identify–in writing–another advisor to take over your client relationships in the event of your sudden death or disability, and that this agreement be signed by all parties and filed with your broker/dealer.

While on the one hand this agreement is simple and quick to put into place, it has some drawbacks when compared to your other options. A revenue-sharing agreement only assigns your clients to someone else to do with what they will. Often only those with the most valuable assets are retained which means two things: 1) protection doesn’t end up covering your entire client base; and 2) your estate will only receive a fraction of what your book of business is worthwhile paying ordinary income tax on the sale.
In terms of protection and control, a revenue-sharing agreement is the weakest option, but it is better than no plan at all.

Guardian Agreement

A guardian agreement offers more protection than a revenue-sharing agreement in that it outlines specific plans for the practice as a whole. Not only does it identify a designee to take over the client relationships immediately, but it specifies that this guardianship is temporary until the practice can be sold on the open market. This plan ensures continued service to clients as well as seeing some value of the practice paid out to an advisor’s estate.

There can still be some holes in protection with a guardian agreement, however. If not considered and planned for from the outset, a triggered sale may be “distressed” and rushed, resulting in less than full value realized. Additionally, without careful selection of a continuity partner that considers client alignment, there is significant risk to client retention. 

Buy-Sell Agreement

The buy-sell agreement offers the most protection for your clients, your estate, and your practice. This plan identifies a partner or employee as the chosen buyer–not just guardian–of the practice at the outset. The agreement is comprehensive, defining terms of the sale and continued operations. The benefits of this type of agreement include: uninterrupted client service, full market value received by the estate, and time to introduce partner to your team and clients ensuring that they are comfortable with where their assets will go should anything happen to you.

Take Action

Though the above continuity plans have varying degrees of protection, the key aspects for success are: that your agreement be in writing, your clients be made aware of the steps you’ve taken to protect their assets, and that you’ve ensured no disruption of service.

Even the smallest amount of continuity is better than none and can be executed relatively quickly to ensure immediate protection. You shouldn’t stop with the minimal amount of protection, however, take the time to craft a comprehensive, formal plan. Your clients will thank you, and you can sleep easier knowing that your family and the practice you’ve spent so much time and energy building are protected from a potential sudden and unexpected exit.

Continuity planning is a key factor in ensuring your business is protected and can continue to grow and thrive. That is why we have made Continuity Planning Support a core benefit our Equity Management Solutions® membership–at every level. This support includes checklists, customized documentation, and consultative advice for getting a plan set up now.