Don't die in the saddle — succession planning for financial advisorsArticle added by Jeffrey Berson on August 27, 2014
jberson

Jeffrey Berson

CARLSBAD , CA

Joined: May 27, 2003

My Company

ISN Network

My dentist, Dr. Frankel, is a good guy. He’s been my dentist for the past five years. Visiting him isn’t my favorite thing to do in the world, but I do it because it’s necessary and the smart thing to do. Now, he hasn’t always been my dentist, but the way he became my dentist is a good lesson in succession planning and one that could be quite useful in the retirement plan advisor world.

My childhood dentist was Dr. Newman and I’d been seeing him since I first started seeing a dentist. As an adult, it was easy to continue to see him because I knew him, he knew me, and he knew my history. One day, about five years ago, I called for my annual check-up. The receptionist told me that she could get me in to see Dr. Newman in two weeks, but if I didn’t mind, Dr. Newman’s new associate, Dr. Frankel, was available tomorrow. I saw no harm in seeing Dr. Frankel. After all, he worked in Dr. Newman’s office so he had access to my records and he had Dr. Newman’s trust and confidence.

I booked my first appointment with Dr. Frankel and the cleaning and check up went smoothly. Later that year, I needed another cleaning. Again, Dr. Frankel was more readily available so I took the appointment with him. By this time, I was familiar with Dr. Frankel. He also knew me and remembered my history. So when I got the letter six weeks later announcing that Dr. Newman was retiring in six months and that Dr. Frankel was going to be assuming the bulk of the case load, it was an easy decision to remain as a patient of Dr. Frankel. What I didn’t realize at the time was that this was Dr. Newman’s succession plan.

Dr. Frankel had successfully transitioned the bulk of Dr. Newman’s patients and was now the primary provider for a large percentage of them. Yes, some of the patients left because Dr. Newman was gone. But most of them had stayed on and continue to stay on. Can this model work in the retirement planning world?

Thinking ahead is a cardinal rule of business. In addition to monitoring the daily operation of your business, you need to think about the future. We ask our clients to do this, so why shouldn’t we? And as difficult as it may be, it’s important to envision the day when you no longer will be in charge. Statistics show that more than 70 percent of small business owners don’t have a succession plan in place (2005 LIMRA Report). Succession planning for a successful retirement advisor is a difficult process and an even more difficult topic to discuss. Typically, there have been few solutions for the owner of a successful retirement planning practice. Most either have a family member to pass the torch to or they try to cultivate a valued employee to take over the business. Otherwise, the only alternatives are to sell the business at a value way below market or to die in the saddle.

Dying in the saddle may sound romantic, but it’s very hard on the horse. In this case, the horse is the business you’re trying to preserve. Let’s take a close look at the two main options and then see how the Dr. Frankel’s transition plan can work better than the other options.

The family succession plan: Passing the torch

If you’re lucky enough to have a family member who is capable and willing to succeed you, then you’re ahead of the game. However, in choosing a successor, don’t force a member of your family to assume unwanted responsibilities. First, find out whether he or she is willing and able to assume the role. If so, make sure you’re in agreement that a moderately paced transition will provide the best environment for the company’s bottom line and overall stability.

Once you decide on the family successor, most experts in the field of succession planning suggest using these steps to pave the way for a suitable successor:
  • Set a target date for your last day with the company and start shifting responsibilities ahead of time. You want to be able to oversee the transition while you're still there.
  • Set standards that take into consideration the needs of your successor.
  • Decide whether to offer stock to retain key employees after the transition.
The main advantage to the family succession plan is continuity. Most of us who own our own business like knowing that what we built will benefit our families for multiple generations. If done properly, a true legacy can be left for your family. Another advantage is that negotiations on price are usually not so painful, although most often the price of the business is paid out of the business’s profits. Or, since we’re viewing this as a legacy transfer, we sometimes discount the cost for the benefit of our family.

Perhaps the biggest obstacle in this process is the negotiation among siblings as to who is the best choice as successor. I often refer to the classic film “The Godfather” as an example of a transfer of power and how tricky it can be. Most of us have seen the film and recall that Sonny Corleone was the oldest son and therefore the most likely successor. When he met his untimely demise, the next in line might have been Fredo, the second-oldest son. But Fredo was passed over for Michael, the youngest son, which didn’t sit too well with Fredo.

Not every business has a family successor in place who is ready to be the leader of the business. At some point, it may become clear that the burden of managing your business requires the skills of a professional with few or no ties to your family. If such a person is already in your employ, his or her ascent to leadership may prove more advantageous to the business than carrying on a "family tradition.” If it’s a valued employee within the company, you’d begin the process about six months before the announcement of the succession, similar to the way Dr. Frankel and Dr. Newman worked their plan. Key clients and accounts will be referred to and serviced by the key employee to establish a sense of familiarity. It’s important that the owner and his successor coordinate the transition and timing of the announcement. As with the family succession plan, you should follow these similar steps once you’ve identified a successor:
  • Set a target date for your last day with the company and start shifting responsibilities ahead of time. At least six months should be allowed for the transition if you want to be able to oversee it while you're still there.
  • Set standards that take into consideration your successor’s needs.
  • Use the strengths of your chosen successor and be sure to emphasize those strengths during the transition period.
The synergy plan: “A succession agreement”

Even if you don’t have a family member or key employee who can be the successor, a new idea is emerging known as the “synergy plan.” It has a track record of success and the ability to adapt to any circumstance. In this process, the owner of the business identifies another organization that is familiar with the synergy transition plan.The key to the synergy plan is the agreement. Both the business owner and the synergy partner must agree that this is a process they want to begin. The agreement outlines the parameters of how the transition will take place, who is responsible for what aspects, and how the parties will be compensated.

Once the agreement is in place, the transition plan is divided into several different areas. Each area is discussed in detail and a plan is put into place. Once the “launch to the field” is implemented, the rest of the succession plan works very similar to the plan that Dr. Frankel and Dr. Newman used. A slow process of funneling requests and business through the synergy partner is created. This seamless integration of the two businesses has no real effect on the reps who work there. Instead, service is increased, relationships are preserved, and a smooth transition process is set in motion. Eventually, an announcement is made to the field that the merger/transition is complete.

As with the example of the dentist, a large percentage of the reps will stay with the new entity. This is the goal and the success of this type of approach has been changing the way businesses view their transition. A synergy plan can be customized for any organization that wants to implement a succession plan. Each agreement takes into account the nature of the business and the values each partner brings to the table. The synergy plan isn’t a purchase, it’s a partnership between the two groups that delivers lasting value to both parties.

Something to think about on your next trip to the dentist.
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