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."
