Advisors need to take their own advice on succession planning

When I first started providing compliance workshops to advisors of all stripes more than 20 years ago, I noticed that a large proportion of the advisors in these groups were from the baby boom generation (born between 1946 and the mid 1960s), with a minority of generation Xers (born between the mid 1960s and the early 1980s) sprinkled throughout the room. It occurred to me at that time that baby boomers might have to plan carefully for their retirement because the process could get tricky with that many sellers and so few buyers.

Although most advisors don’t realize it, the first question they need to ask is whether they are permitted to sell their business? And if they are permitted to do so, to whom could or should they sell? To do that, you need to review the contract you entered into when you joined your dealer — and any updates signed thereafter. Specifically, the terms of the contract may provide that you agreed that the clients belong to the dealer, or it might not indicate that at all.

Whether the contract is enforceable is not the subject matter of this column because the particular language of each contract would need to be reviewed in light of the particular circumstances. You need to find a copy of this contract, review it and determine what rights or obligations you have in respect of your clients and your dealer.

Assuming that the contract does not indicate that the clients are those of the dealer, then you may very well be entitled to sell your business to whomever you wish to sell it to. Note, however, that even though some dealers technically own the clients and your business, they might have a purchase plan in place that’s really a succession plan. Such a plan pays the retired advisor a certain amount to assist with a smooth transition of his or her business. Although this is technically not a sale of a book of business, this type of transition does permit the retiring advisor to put some money in his or her pockets that he or she wouldn’t otherwise have the right to.

However, if you are permitted, according to the terms of your contract with your dealer, to sell your book of business because the clients are yours, whom do you then actually sell it to?

Some dealers already have a succession program in place in which they help match advisors approaching retirement with others who are in the growing stages of their businesses. Regardless of whether the dealer recommends the purchaser or whether the advisor seeks out his or her own buyer for the book of business, both purchasers and sellers need to ensure that the match is good and that the terms of the purchase and sale are agreeable to both. Each party needs to meet with his or her own corporate lawyer to ensure he or she understands the terms of the written contract to avoid surprises, which could lead to costly litigation.

For example, you need to know that regardless of whether you’re selling your book of business or being paid for a smooth transition, your clients are under no obligation to accept the services of the successor or purchaser. In fact, there’s nothing you can do to make these clients stay with the purchasing advisor. Nevertheless, the purchase price is usually tied to the assets that do transition over to the purchasing advisor. So, it’s in the interests of both the seller and the purchaser to encourage the clients to transition to the purchasing advisor.

Another point of advice to advisors who are selling their books of business is not to wait until they’re on the eve of retirement to begin thinking about these issues. Although it may be a difficult issue to face up to, you need to know that it can take a year or more to find a suitable purchaser. Then, it can take several months, if not a year, to negotiate the terms of a mutually agreeable contract. Finally, if the purchase price is tied to the assets that transfer to the purchaser successfully, it can take another year to transition the business over to the purchaser.

Nevertheless, just like you help your clients plan for and transition into retirement, you will also want to plan for your retirement. So, brush the dust off your contract, find a suitable purchaser or successor and get the right legal advice so that you can sail into your retirement in comfort and peace.

Editor’s note: For more insight on succession planning for advisors, see George Hartman’s video series Succeeding at Succession.