Attention, investors: Your advisor's succession plans matter to you

As financial advisors, we pride ourselves on being the voice of fiscal reason for our clients.

We take our fiduciary responsibilities seriously, advising and planning in an effort to ensure that each of our clients will be well cared for financially. Yet when it comes to planning for our own legacy, far too many of us fail to conduct adequate planning around what is likely our single most valuable asset: our business.

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All too often, I see principals of advisory firms convince themselves that they have a succession plan in place when, in factmore often than not—what they have is more of a vague idea of what they hope will happen.

We all know, however, that things don't always go according to plan. Successions are complex undertakings. They can be exceedingly uncomfortable. But the cold, hard facts are that none of us will be running our businesses forever, and we need to plan for that inevitability.

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Investors should ask themselves this one simple question: Do you believe that if you went to sleep tonight and didn't wake up, the firm you have a relationship with today should be entrusted with the ongoing management of your family's wealth?

If your answer is "yes," congratulations; this is a good litmus test for the value you receive today and the value your family would continue to receive in the future.

Now, another question for investors: If your advisor went to sleep tonight and didn't wake up, would you continue to entrust the firm he/she left behind with the ongoing management of your family's wealth?

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If your answer is "no," "maybe" or "we would have to see," it's time you asked your advisor more questions to fully understand what happens to you if something happens to him or her.

Approximately 7 percent of wealth management firms report having a succession plan—actionable should the firm principal(s) become incapacitated or die—in place, according to business consultancy Moss Adam.

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What most advisors call an "actionable plan," however, is often merely a vague verbal agreement as to what they would like to happen. It's ironic because, as advisors, we place a great deal of effort into ensuring the continuity of client services in the event of a physical disaster.

For example, we cajole business-owner clients about the need to have succession plans in place. Yet most of us fail to exercise the same diligence when it comes to the absolute inevitability of separating ourselves from our firm.

So what's the best way to determine if your advisor has a true succession plan in place? A genuinely viable plan will incorporate the following five fundamental aspects:

  1. Advisor's long-term vision: The development of a clear understanding of where they're currently at and what they ultimately want to happen to the firm. It also includes where they choose to take the firm in the interim, what they most love to do and whether or not the firm has the right human capital to get where they want to go.
  2. Advisor's preferred succession strategy: Is there a logical internal successor? Is there a potential trusted third-party buyer? Or do they plan on pursuing a sale to a roll-up/aggregator firm?
  3. Funding mechanism: Whether funding a succession through life insurance or a third-party purchase agreement, it's important to ensure there's funding in place for the transaction, as well as sufficient funding to cover any estate taxes that would be generated from the sale.
  4. Detailed documentation: When it comes to the long-term viability of the firm, verbal agreements are worth the paper they're printed on. There must be detailed documentation that lays out every detail of how a business will be transitioned.
  5. Communications strategy: A succession plan shouldn't be a backroom agreement that's kept quiet. For retention purposes, employees and clients need to be made aware of the fact that there's a plan in place to ensure a firm's long-term viability.

If you haven't inquired with your advisor about his or her succession plan, it may be a worthwhile question to ask. An insufficient or nonexistent succession plan is a disservice to you, and your advisor has a fiduciary responsibility to create a succession plan that's comprehensive, efficient and transparent.

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Imagine the shock I received 14 years ago when my advisory council told me, in no uncertain terms, that without me they would leave the firm that I spent my life building and growing.

"An insufficient or nonexistent succession plan is a disservice to you, and your advisor has a fiduciary responsibility to create a succession plan that's comprehensive, efficient and transparent."

Now, 13 years later, I have reengineered the firm and implemented a succession plan so that every single employee and client knows exactly how continuity of service will be maintained in the event of my death or disability. It takes some effort, but it is well worth it.

My advice to my fellow wealth managers is: Don't make the mistake of waiting until it's too late or assuming that the loose arrangements you've made will come to fruition. Take a cold, hard look, and make an honest assessment of your plan.

And my advice to investors is: Ask your advisor detailed questions to fully understand his or her succession plan and how you could be impacted in the event of an unforeseen circumstance.