Providing a Safety Net: Recognizing risks, some branches now offer built-in continuity and succession plans

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Without the protection of a continuity and succession plan, advisors may be putting the fruits of a long career at risk when they retire, die or are unable to work. But lacking the time, resources and know-how to develop these plans, many continue to operate without the protection of these valuable safety nets.

Knowing how challenging it can be for an advisor to come up with a plan that’s best for their clients, business partners and families, some OSJs and branches now offer standardized plans as a benefit of joining their firm.

These can be continuity plans, which outline the arrangements for the operation or sale of a business if the owner dies or becomes incapacitated; a succession plan, which details the sale of a firm when an advisor retires; or a single hybrid plan that covers all scenarios.

Unfortunately for Navigation Financial Group in Dallas, Texas, it took a tragedy to realize the importance of offering its advisors a plan that covers succession and continuity.

In 2001, one of the firm’s advisors died suddenly. Without an agreement arranging for the sale of his business, his wife was left empty handed. She then sued the OSJ for compensation.

“Our brothers in the industry outside our firm smelled blood in the water and swooped in and got a change of advisor form signed,” said Clyde Wyatt, the firm’s managing director. “In months, maybe weeks, the deceased advisor’s practice was gone.”

The lessons of that costly loss prompted Navigation Financial Group to offer a standard agreement to protect its advisors, their family and the OSJ. The agreement provides a transfer of the business in the event of an advisor’s death, permanent disability or retirement. It also helps determine the fair market value of a business and outlines the method of payment that will be used to make the purchase while enabling the new owner to work with clients after the sale is complete. Without a prearranged buyer, the OSJ will purchase the business and compensate the survivors.

Securities America Continuity Graphic

While the plan ensures a business will be sold and a family will be paid, it doesn’t guarantee they’ll receive top dollar for the assets. The agreement was purposefully worded this way as incentive for advisors to seek out a more lucrative plan, Wyatt said. In some arrangements, he has funded a life insurance policy for a firm that pays the beneficiary — typically a partner or a junior advisor — the benefits needed to purchase an advisor’s business when he dies.

Navigation Financial Group requires all advisors to sign the succession agreement or sign a document, with their spouse present, stating they are refusing to sign the offered agreement.

In addition to providing a much-needed safety net, having a built-in plan has benefited recruiting efforts, Wyatt said. He recently signed on two advisors who both said the succession plan was a primary reason for joining the branch.

Wyatt’s Plan Inspires California OSJ

While serving with Wyatt on the Securities America Branch Manager Advisory Council, Art Cooper, managing director of Cooper McManus Wealth Management in Irvine, Calif., realized many advisors in his OSJ were also operating without the protection of succession and continuity plans. After speaking with Wyatt about the agreement offered by Navigation Financial Group, Cooper adopted the same basic plan for use at his firm.

Under the Cooper McManus agreement, if a business needs to be sold due to the death, disability or retirement of an advisor, it will be offered to the successor for one times the verified trailing 12 months of revenue. The balance of the purchase price would be paid in equal monthly installments over three years.

The agreement helps a business live on after the owner is no longer in the picture, Cooper said, but it’s only meant to cover the basics. Like Wyatt, he encourages his advisors to find a more comprehensive plan on their own.

“It’s not ideal,” Cooper said. “We still encourage advisors to get a more formal agreement. This is a backup. It’s not meant to be a rich agreement.”

Even with a built-in plan, Cooper admits it’s still difficult to get buy-in from all advisors. Only about 20 of his 55 active producers have signed it. Of those who have not signed the agreement, just 10 have another agreement in place. So why don’t advisors take advantage of the plan? Apathy and procrastination, Cooper said.

“They know they need to do it, but the default is to put it off and put it off and put it off,” he said.

That mindset commonly reverses as advisors reach their 60s and 70s, when they recognize the potential problems that could arise if they continue working into their golden years without a plan, Cooper said.

“The older advisors start feeling their mortality,” Cooper said. “That’s when they ask to have something in place to protect their spouse.”

Iron Point Plan Changes Recruiting Philosophy

In 2010, Rob Santoriello, president and CEO of Iron Point Financial Advisors., in Folsom, Calif., noticed many of the firm’s advisors were nearing retirement age without a succession or continuity plan. Foreseeing the potential for costly problems, Santoriello approached Securities America’s Practice Management Department to help devise a solution. The answer was a standardized plan that combined agreements for succession and continuity and is available to all Iron Point advisors.

Having a plan has also changed the firm’s recruitment philosophy. To ensure it has enough young advisors ready to step in and purchase a business, it now focuses on attracting and retaining millennials.

“We have a standardized OSJ continuity and succession plan for every one of our advisors,” Santoriello said. “If they don’t have one already, we can be their backup. If something happens to you — you pass away or become disabled — a broker-dealer cannot pay your family members unless they are licensed. We step in to be the backstop. We purchase the practice.”

Santoriello has witnessed firsthand how important it is for an advisor to decide who will oversee the practice when it’s time to step aside. In 2014, he purchased his business — formerly called Rios and Associates — from its founder, Richard Rios.

Having a plan has also changed the firm’s recruitment philosophy. To ensure it has enough young advisors ready to step in and purchase a business, it now focuses on attracting and retaining millennials.

“We looked at our number of older advisors and saw that there wasn’t a lot of youth in the branch,” Santoriello said. “We have the bandwidth in the OSJ now to recruit younger advisors, get them ready to do a practice acquisition and get their house in order.”

Because many junior advisors are still building their books of business and are below the firm’s traditional production minimum, Santoriello said he’s had to rethink some of his recruiting standards. This shift in strategic priorities has proven successful.

“As we’ve moved to retain practices, we’ve brought in younger advisors who have worked to grow themselves,” Santoriello said. “If they were below the production minimum, but there were extenuating circumstances, and they were a millennial advisor who was doing all the right things, we still take a look at them. They’ve all benefited from linking up with a senior advisor and creating a succession plan.”

From ensuring an advisor’s business legacy lives on to compensating families and attracting the next generation of young advisors — many OSJs and branch offices are discovering the benefits of offering built-in continuity and succession plans far outweigh any time and effort spent developing them.

Securities offered through Securities America, Inc. Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc.

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