It could happen to you

“It’s amazing how many people delay one of the biggest decisions with respect to their businesses,” Edmond says. “They’re so caught up in the day-to-day that they forget to plan so the family or business continues on.”

Dan Richards, CEO of Clientinsights in Toronto, says most dealership firm executives have seen books of business auctioned off after an advisor in his or her 30s or 40s has died suddenly. An astounding proportion of advisors are unprepared for succession, he adds, either for planned retirement or unforeseen, premature death.

“Advisors are far from unique as business owners in not being particularly good at planning for unexpected events,” Richards says. “They may have insurance, but it is not common for advisors to be proactive in having a strategy should something go wrong.”

Richards cites the proverbial shoemaker’s children – who go barefoot because their father is too busy making shoes for his customers.

Says Richards: “Should advisors have some kind of disaster scenario planning? Clearly, the answer is yes. Do most do it? No. The reason is the same as for most entrepreneurs: they’re busy and it’s not a priority.”

It’s understandable that you, as, say, a 40-year-old advisor, might not need a succession plan in place to guide your retirement 25 years from now. But, regardless of your age, you should be prepared for accidental death or incapacity.

If there is no written plan, Edmond says, your firm’s future becomes uncertain and the business could be sold for less than it is worth. If you are sole owner of your practice, your spouse might inherit the practice, which could present another set of problems.

“The spouse might not know anything about the business,” Edmond says. “[He or she] would have to hire somebody to conduct the sale, and that costs a lot of money.

“As with any business,” he adds, “you have to make plans in the event a key person or owner dies, becomes disabled or suffers a critical illness.”

The key component of such a plan is a buy/sell agreement – a legal document that specifies what should happen to your business if one of the partners dies suddenly or becomes incapacitated.

A small firm

A buy/sell agreement for a small firm of two partners, for example, might specify that, upon the death of one partner, the surviving partner will buy out the other’s share by paying the deceased partner’s surviving spouse (or estate). In some cases, the grieving spouse will be paid over a period of time, perhaps five or 10 years.

Buy/sell agreements typically are funded by life insurance; the firm uses the insurance benefit to pay the deceased advisor’s spouse. Edmond’s buy/sell agreement is funded by critical illness insurance, disability insurance and a sizable amount of life insurance.

“We have clear directions on how things would be handled in the event of death, critical illness or disability,” Edmond says. “Is it perfect? No. But it’s way better than having nothing.”

A buy/sell agreement can be drawn up by a lawyer, usually for a reasonable fee – and a bargain, considering the problems such an agreement can prevent.

Once this document is drawn up, however, it should not be left in a filing cabinet untouched for the next couple of decades. Edmond recommends reviewing the document every two years to make sure it is up to date with changes in the business and in the personal lives of the advisors.

Unexpectedly losing a single advisor at an independent firm with multiple advisors can have a detrimental impact on the office and working environment, according to Clay Gillespie, managing director of Rogers Group Financial Advisors Ltd. in Vancouver, which has 15 advisors.

So, to take some of the surprise out of what would be an emotional situation, Rogers Group has a policy in place to deal with the unexpected death of one of the firm’s advisors. The firm holds life insurance on all of its advisors, and if and when one dies, an established, repeatable procedure is followed.

“If somebody dies,” Gillespie says, “we know exactly what we’re going to do and how it will affect the firm.”

Among other steps, ownership of the deceased advisor’s clients automatically reverts to the firm. And the insurance benefit can pay the advisor’s estate quickly.

Dealing with the death of a friend and colleague is difficult enough. “You have to get over the emotion of one of your friends and partners dying,” Gillespie says.

Having the succession issues worked out and documented in advance makes things run as smoothly as can be expected.

Keeping clients happy

“We are able, with all of these processes and procedures,” Gillespie says, “to keep the revenue [within the firm] and keep the clients happy.

“If you have to deal with all of the other issues,” he adds, “while emotions are high and while trying to take care of the client, nothing is going to go well.”

Processes and standards in dealing with clients are fairly consistent among Rogers Group’s advisors, so having one advisor to step in and handle another advisor’s clients is relatively easy.

Rogers Group has a number of health-related policies, including a requirement that advisors undergo executive medical examinations.

“People never go to the doctor [voluntarily],” Gillespie says. “We force them to, so if there’s something wrong, they can start dealing with it. Death is not good for a firm.”

Larger firms often have the resources and the foresight to make succession planning a priority.

Winnipeg-based Investors Group Inc., for example, has guidelines and policies to deal with succession planning, says Vas Pachapurkar, the firm’s vice president, financial services for Ontario, in Toronto.

Matching people up

There’s not much difference, from a business point of view, between an advisor leaving the company because he or she is retiring or that advisor leaving because he or she died unexpectedly, according to Pachapurkar.

The regional director in each of Investors Group’s 110 regions across the country is charged with distributing a deceased advisor’s clients to other advisors in that region.

“It’s about matching people up,” Pachapurkar says, “looking at the client base, understanding demographics and the capacity of other consultants.”

An advisor’s notes and other documentation are attached to client files, so if an advisor is incapacitated in any way, the successor advisor can resume serving the incapacitated advisor’s clients with minimal disruption.

Pachapurkar says you should be prepared to have the tables turned on you during meetings with younger clients; those clients might have questions about your life expectancy and succession plan.

“If I was a client,” Pachapurkar says, “it would only be natural to ask somebody who wanted to work with me: ‘I’m happy to work with you now. But if you’re 60 years old, what happens to me if something happens to you?'”

Gillespie adds that it is only logical that a firm be prepared for a death in the office. After all, what would clients say if a firm is unprepared?

“It’s what we do for a living,” Gillespie says. “It would be a shame if we didn’t do it for ourselves.”

Funding a buy/sell agreement

If you don’t have a buy/sell agreement in place for your business, you may be guilty of the same sort of mistakes you tell your clients to avoid: being unprepared for the unexpected.

A buy/sell agreement is a crucial succession-planning document designed to ensure a smooth transition should you or a business partner die or become incapacitated.

First, this document outlines terms that will take care of the spouse or estate of the deceased (or ill) partner; that spouse would be given fair cash value for the deceased or incapacitated advisor’s ownership of the business.

Second, by requiring that the spouse exchange his or her shares in the company for cash, the buy/sell agreement ensures that the surviving spouse is not thrust into an active management or ownership role in the firm. That scenario would not serve anybody’s purposes unless the spouse already was active in the business.

Clay Gillespie, managing director of Rogers Group Financial Advisors Ltd. in Vancouver, says a buy/sell agreement also should spell out what happens to the clients of the deceased advisor. The document can state, for example, that those clients’ accounts will be taken over by other advisors in the firm. Rogers Group has buy/sell agreements with all of its advisors that specify that their clients will remain with the firm once the advisor is no longer practising.

Insurance is the easiest and most common way to fund a buy/sell agreement. The insurance benefit is used to purchase an advisor’s interest in the firm from his or her estate.

But insurance is not always a viable option. If your health is a question mark – because of high blood pressure or diabetes, for example – you might be uninsurable.

Don’t despair. You have several options at your disposal:

1. Look into a “rated” insurance policy. You’ll have to pay more for this type of policy because of your condition, but you’ll still have coverage.

2. Use cash from existing assets. Then, either pledge those assets to get a loan or liquidate those assets.

3. Self-insure. Set up a savings plan and put money into it every month to build up a reserve.

4. “Borrow a life.” If there is somebody else in your company who is approximately the same age as you, take out insurance on him or her. If that person dies first, your firm has the money needed in a lump sum. If you die first, the insurance on the other person will have built up a cash reserve, which can at least partially fund the buy/sell agreement.

5. Have the beneficiary take over. If your spouse happens to be in the financial advisory business, and he or she has the same level of knowledge and expertise as you do, arrange for him or her to move into your office and take over from you.

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