How to Create a Continuity Plan for Your Financial Planning Firm

As the majority of the existing advisor population continues to move towards retirement, succession planning has become one of the most talked about industry topics.

The reality is that most advisors won’t actually implement a full succession plan. Instead, they will continue to serve their existing clients until some life event occurs and they sell their firm to another advisor for a multiple of revenue.

This approach poses a number of risks. For example, the buyer often struggles with client retention, and the seller likely has not maximized the full equity of their firm.

While much of the industry focuses on the buying and selling of practices, a critical step in protecting any business—regardless of an advisor's age—is often overlooked: developing a continuity plan.

Advisors often have these tough conversations with their clients yet fail to do so with themselves.

What would happen to your business and clients in the event of your death or disability? Who would take care of your clients? And would your family get anything for the business you worked so hard to build?

While not a fun conversation, it’s a necessary one. If you don’t have a formal agreement in place, there’s a good chance your clients will become “orphan accounts” at either your current firm, broker-dealer, or custodian.

Additionally, regulations prohibit the payment of securities compensation to unlicensed individuals without that formal agreement in place, so your family may not receive any monetary value for your business.

Talk about a lose-lose situation—one that could have easily been avoided with the creation and implementation of a continuity plan. 

Getting Started

If you don’t have an agreement and you aren’t sure where to start, the North American Securities Administrators Association (NASAA) has adopted a model rule regarding succession and continuity planning that provides some guidance on how to structure and what needs to be included in a continuity plan.

I’ve outlined some steps below to get this process started.   

The first step in the process of putting a continuity plan into place is finding another advisor to enter into an agreement with.

This person does not have to be your ultimate successor. It's most important to have an agreement in place with a qualified advisor; once you have identified your long-term succession plan, you can always amend it down the road.  

Below are some things to consider when deciding who to enter into an agreement with:

• Does the potential buyer’s business model align with your business model? Do they have similar planning services and offerings, do they use the same custodian/clearing platforms, and do they have a similar investment/planning philosophy?

• Does the potential buyer have the capacity to take on your existing business?

• Does the potential buyer’s expertise align with yours and your clients’ needs?

• Does the potential buyer have a similar geographic footprint and the appropriate licenses? 

All of these considerations will help ensure the buyer can effectively service your clients should your firm need to be transferred to a new advisor.

The ideal scenario is to identify another advisor in your firm. However, many advisors who have started their own businesses are the only advisor in their firm. If this is the case, you can look for another firm with a similar business model as yours.

Determining Purchase Type

Next, you need to determine the type of purchase—asset or entity—and what would be included in the sale.

Asset purchases are most commonly used in these type of arrangements. In this case, the buyer acquires the “company assets” and not the actual entity. With asset purchases, it’s important to define what’s included in the “company assets.”

If you decide to do an entity purchase, it's important to know that typically the liability will also transfer with the entity.

Determining Payment Structure

After determining what's included in the purchase, the next step is to determine the payment structure of the agreement. There are a number of different ways to fund these purchases; generally, the structure of the buyout will depend on who the buyer is, whether an existing partner or an unaffiliated advisor.  

There are three payment structures that that are most often used: a down payment or one-time payment, ongoing promissory notes (monthly, quarterly, or annually), or a percentage of revenue generated from the company assets. (Insurance can also be used to fund these agreements.) 

If you are using a down payment or promissory note, you can expect less in return than you would using a percentage of revenue because the payment is guaranteed and not based on future revenue.

Using a percentage of revenue can be advantageous to the buyer and seller. The payments are made from revenue generated from the company assets, and the buyer and seller work beforehand to develop a proper transition plan, which will increase client retention and maximize the revenue to the beneficiary.  

Transfer of Client Information and Agreements

It is crucial to consider the transfer of client information and agreements when developing a continuity plan.  

Let’s start with the transfer of client information.

Protecting your clients’ privacy must be a top priority in any continuity or succession plan scenario. Generally, if the transfer is within the same firm (under the same privacy agreement), client information can be shared with the new advisor.

However, if your agreement is with an advisor at another firm, your clients’ confidential information may not be shared without the clients’ express written permission. This is why it's important to not only communicate with your clients that you have an agreement in place with another advisor, but to also have them sign a letter of authorization allowing you to share their information if the agreement is triggered.

This serves two purposes. First, it gives your clients peace of mind that if something happens to you, they will continue to be taken care of. Second, it helps facilitate a smooth transition.  

Now let’s discuss the transfer of client agreements. Ultimately it is up to the client if they want to transfer their agreement from you to the buyer.

However, whether or not positive or negative consent is required for the transfer will depend on the agreement itself as well as your state rules. To ensure a smooth transition, you must determine this prior to the necessitated implementation of a continuity plan agreement.

Additional Communication Considerations

Client communication is one of the most important aspects of implementing a successful continuity agreement, but the communication doesn’t stop there. There are other business partners who also need to be notified.

Any third parties that are involved in servicing your existing clients will need to be notified if the agreement is triggered. This could include your money managers, custodians, and tech partners such as your CRM, financial planning software, and portfolio management systems. You must establish processes and a clear communication plan to transfer system access and information to the appropriate party should the agreement need to be implemented.

Reviewing your continuity agreement with clients and business partners is necessary—it's also equally as important to review this agreement with your family and beneficiary.

First, it's important for them to understand your plan for your business should something happen to you. It's also important for your beneficiary to understand how the valuation is calculated and how payments would be facilitated. If the buyout is structured as an earn out, ongoing payments may fluctuate—understanding that will help ease the stress associated with a transition.

Finally, I would encourage you to review this agreement on an annual basis. Things change, whether it's the valuation of your business, your beneficiary, or the advisor/firm you have identified as your successor.

Take the First Step

You’ve learned the basics of continuity plans—now what?

First, meet with your attorney to discuss setting up a continuity plan agreement.  

Next, identify another advisor or firm you think could be a good fit as a continuity planning partner.  

Then, get to work designing your plan. Check with your firm to see if they have a template agreement you can use or if they provide guidance on getting started. If you are an XYPN member, we have developed a template agreement and list of considerations when setting up a continuity agreement.

Every advisor, regardless of age, needs to have a continuity plan in place to ensure their clients’ needs will continue to be met in the event that they're no longer able to serve them. It's time to take this important step and protect the future of your business.    

About the Author
As XYPN's Director of Advisor Success, Malcolm is tasked with doing just that—helping advisors succeed. After graduating from Gettysburg College with a B.A in Management, Malcolm jumped straight into the financial services industry and never looked back. With a drive to help shape the future of financial planning and a passion for bringing financial advice to the next generation of clients, he has a lot in common with the advisors in the Network.