Without the protection of a continuity and succession plan, financial professionals 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 a financial professional 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 a financial professional 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 financial professionals a plan that covers succession and continuity.
In 2001, one of the firm’s financial professionals 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 financial professional's practice was gone.”
The lessons of that costly loss prompted Navigation Financial Group to offer a standard agreement to protect its financial professionals, their family and the OSJ. The agreement provides a transfer of the business in the event of a financial professional'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.
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 an incentive for financial professionals 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 financial professional — the benefits needed to purchase a financial professional's business when he dies.
Navigation Financial Group requires all financial professionals 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 financial professionals who both said the succession plan was a primary reason for joining the branch.
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 financial professionals 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 financial professionals.
“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.
Seven Iron Point financial professionals have entered into a succession or continuity plan agreement, meaning their businesses are in the process of being bought or have already sold.
Having a plan has also changed the firm’s recruitment philosophy. To ensure it has enough young financial professionals ready to step in and purchase a business, it now focuses on attracting and retaining millennials.
“We looked at our number of older financial professionals 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 financial professionals, get them ready to do a practice acquisition and get their house in order.”
Because many junior financial professionals 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 financial professionals 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 financial professional who was doing all the right things, we still take a look at them. They’ve all benefitted from linking up with a senior financial professional and creating a succession plan.”
From ensuring a business legacy lives on to compensating families and attracting the next generation of young advisors — many OSJs and branch offices are discovering the list of benefits that goes along with offering built-in continuity and succession plans far outweighs any time and effort spent developing them.