Securing Value for Your Future

Posted by FP Transitions on Feb 19, 2015 8:00:00 AM

It’s not just a financial advisor mentality; it’s a human mentality. We KNOW life is finite, but we don’t want to think about our mortality, and we certainly don’t want to plan 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.

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So few of you, however, take your own advice. In a recent Investment News article, “When Time Runs Out,” by Liz Skinner, she cited an SEI Advisor Network survey that found only 20% of advisors have an executable continuity plan. That means less than a quarter of advisors have a plan in place that is comprehensive and in writing with clear steps as to what happens in the case of sudden death or disability.

Skinner’s article examined the fallout of unexpected death and disability for the clients of three advisors. Overwhelmingly, their first reaction was shock and sadness, followed closely–and understandably–by the question of what was going to happen next for their plans and finances. Some were upset that the independent advisor they’d trusted with their money hadn’t taken steps to ensure the asset management continued without any gaps.

The issue of continuity is fast becoming one that your clients 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.

Skinner reminds us that the SEI survey discovered 69% of respondents intend to put a continuity plan in place within the next 3 years. But a lot can happen in that time. Think about it, how many life-changing events have happened to you and those close to you in the last three years? And frankly, unexpected events are just that: unexpected.

You may think you’ve protected your clients, your practice and your family with a verbal agreement or handshake, but unless you have a written, actionable plan all you’ve done is stashed your cash under the mattress instead of in the bank. FP Transitions’ own CEO, Brad Bueermann was quoted in Skinner’s article laying out continuity options with varying levels of protection: 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

A revenue-sharing agreement is the weakest option in terms of protection. This plan only 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 significant drawbacks. 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 worth while paying ordinary income tax on the sale.

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 are still holes in protection, however, with a guardian agreement. Often sales triggered by the sudden exit of an advisor are distressed and do not always realize the full value of a practice. Additionally, there is significant risk of clients’ assets going to an advisor that they may not be comfortable with.

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 of the practice at the outset. The agreement is comprehensive, defining terms of sale and continued operations: service is uninterrupted, an advisor’s estate receives market value (usually taxed at Long Term Capital Gains rates) for the practice, and you have the chance to introduce your partner to your clients making them more comfortable with where their assets will go.


Though these continuity plans have varying degrees of protection, the key is that your agreement be in writing, and your clients be made aware of the steps you’ve taken to protect their assets.

Even the smallest amount of continuity is better than none and can be executed relatively quickly to ensure immediate protection. “Advisors try to be perfect when what they really need to do is just something,” Bueermann says in “When Time Runs Out.” But while it’s important to protect your client’s assets now, you shouldn’t stop with the minimal amount of protection. 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 your sudden exit.

FP Transitions offers comprehensive continuity support for protecting your practice including checklists, customized documentation, and resources for informing your clients of your plans.

Topics: Continuity Planning