A Tricky Problem: Succession Planning For IBDs

A significant challenge the adviser industry faces today is how to manage succession as its population ages.

Cerulli Associates puts the average adviser age at 50, with 39% age 55 or older. Within the independent broker-dealer channel, 41% of advisers have reached or passed age 55.

Recognizing this reality, major IBDs have executive teams focused on succession planning.

“We can help with appraisals, documents, consulting services and assistance in buyer-seller negotiations,” says John Williamson, director of strategic initiatives at Wells Fargo Advisors Financial Network.

Nevertheless, to create successful succession plans, IBD advisers will have to truly act independently to tailor satisfactory exits for individual circumstances.

“The advisers drive the agenda,” says Williamson, “which can be very personal. In many cases, their practice is their life’s work.”


Perhaps the most valuable contribution in this realm from IBDs is the message that succession planning is a two-chapter story. At any age, advisers should have a plan in place to protect themselves, their families and their practices in case of death or disability.

IBDs might call such arrangements business continuity or catastrophe plans. By any name, they’re differentiated from true succession plans, which are meant to provide an ordered transition to retirement.

“Catastrophic plans generally are based on a buy-sell agreement, which provides a buyer when a trigger event occurs,” says Nate Lenz, vice president, succession planning and acquisitions, for Raymond James Financial Services. “It usually spells out a method for setting the buyout price, and often includes a source of liquidity.”

While catastrophic plans can be vital at any age, long-term business succession plans typically appear relatively late in an adviser’s career.

“Such plans are usually created when retirement is in sight,” says Lenz. “Long-term business succession plans include death or disability, as well an arrangement for a buyout as the adviser goes into retirement or semi-retirement. The buyer in this long-term succession plan might not be the buyer in the original catastrophe plan.”

If a new buyer is lined up for the long-term plan, how can the buyer under the catastrophic plan be sidestepped? Lenz explains that the standard sample agreements provided by Raymond James include rescission language that would allow for changes to or cancellation of the agreement with written notice by buyer or seller.


For either type of plan, advisers practicing within a group may have an advantage, as succession plans might be executed with other team members.

“That was one of the reasons I transitioned from my solo practice,” says Laurie Renchik, CFP, partner and senior financial planner at the Southfield, Mich.-based Center for Financial Planning, which offers securities through Raymond James Financial Services. “I didn’t have a succession plan before I joined the Center. Now the risk of something happening to me [death or disability] has been mitigated. Our plan provides peace of mind for me and ultimately serves clients well, with generations of families knowing that there is a team in place today and in the future.”

Since joining the Center, Renchik has been on both sides of such a transition. “Over the last five years we have completed a succession plan from the first generation of ownership to the second generation,” she says.

The plan provides deferred compensation for partners who reach age 65. “That’s when ownership transfers begin and succession is initiated,” says Renchik. “The buyout is based on a participant’s membership interest in the company, and includes a return of each participant’s interest in retained earnings over the same five-year schedule. I am now part of the second generation of owners. We continue to work hard to identify young talent so we can look down the line for future leadership and sustainability.”

Group membership also is involved in the exit strategy of Damon Dyas, CFP, an adviser at Cornerstone Financial Group, a private practice of Ameriprise Financial Services in Southfield. “I completed my succession plan about five years ago,” he says. “My agreement is with one adviser within the practice, according to the requirements of our broker-dealer.”

According to Dyas, his plan spells out what would happen if he suffered a disability that would not allow him to serve clients, or if he died. “A practice valuation would be completed,” he says. “Then the buyer and myself or my heirs would agree to a practice-purchase payment option. That could be a lump sum, an upfront deposit plus payout or a level payout over time.”

Dyas suggests advisers check with their broker-dealer to see if they can get forms or sample language.


“Recently, we’ve seen a trend to teams and ensemble practices,” says Todd Doherty, an M&A consultant with Leavenworth, Wash.-based Key Management Group, which primarily works in the IBD sector. “However, it used to be that IBDs worked mainly with solo practices.”

Thus, there are still solo IBD advisers searching for succession planning strategies.

“I wanted to find a way to share profits with my staff,” says Grant Johnstone, CFP, managing principal of Johnstone Financial Advisers in Lake Oswego, Ore., which clears through Wells Fargo Advisers Financial Network. “At a conference, I heard David Grau of FP Transitions speak. He presented a different structure, one that’s comparable to succession planning at an accounting or law firm.”

Johnstone followed up and instituted the same type of program, which has been in effect at his firm for more than two years. “With this plan,” he says, “some employees become shareholders of the firm. It’s become an integral part of our compensation model and a selling point in recruiting. People like the idea of sharing in profits and building equity. What’s more, you must be a licensed adviser to participate, so the plan has spurred people to get the required licenses.”

As Johnstone explains, he was a 100% owner of the firm when the plan was instituted. “I’ve been selling my shares to the next generation of owners,” he says. “Some people are buying the shares outright and some are getting outside funding. Otherwise, I’m lending money for the share purchases, at market interest rates.”

He adds, “When the new shareholders get distributions of the profits, they use that money to repay me. Typically, 70% of the distribution goes to pay down the note, while the other 30% goes to pay tax on the distributions. The loans are scheduled to be paid off in four to six years. This approach is new to our industry, but I think it could be the wave of the future.”

Sandi Weaver, CFP, senior adviser at Petrovic Weaver Financial Services, which has offices in Prairie Village, Kan., and Kansas City, Mo., had her own financial planning and investment management firm until 2015. “Back in 2012 and 2013,” she recalls, “I worked on succession planning with the firm that custodied my clients' accounts. I didn't achieve much beyond academic exercises.”

Weaver turned to networking in 2015, discussing succession planning with local CFPs who were about her age. One of the planners Weaver approached for leads was Alex Petrovic, Jr., who had worked with her on an FPA chapter committee. The outcome: By late 2015 Weaver had sold her practice, creating the merged Petrovic Weaver firm, where Petrovic, Jr., also is a senior adviser and his son, Alex Petrovic III, CFP, is president.

“Raymond James got involved because of the purchase,” says Weaver. The Petrovics held their clients' accounts at Raymond James, and Weaver has moved her accounts there as well.

Alex Petrovic III explains that the merged firm chose to consolidate its accounts at Raymond James, which has “increased its custodial platform offering to entice RIAs. We didn’t want to train people for two different platforms and sets of forms and service people, so we decided to select one custodian. Based on our positive experience in the past, and the enhancements made in the past few years at relatively little cost to us, we decided to stay at Raymond James and bring Sandi’s clients there.”


As Doherty points out, “An IBD has several reasons for keeping transactions within its own advisers, rather than seeing a sale to an outsider. The broker-dealer won’t want to see assets leave the platform. If a senior adviser sells to a younger, more active adviser working with that broker-dealer, it can mean growth for the IBD. Also, the IBD may have more control with internal succession, to give clients a good experience. Ultimately, clients belong to the broker-dealer, which will want to retain them.”

That said, an IBD must tread carefully when advisers within the network are negotiating a transaction. “We walk a fine line, not wanting to antagonize buyers or sellers,” says Jeremy Holly, senior vice president, strategic business solutions, business consulting, at LPL Financial, who asserts that 75% of its practice sales are LPL to LPL. “We play mediator, helping our advisers make sense of the deal structure.”

According to Holly, valuation usually is not a sticking point. “In fact,” he says, “an adviser might accept a bid that’s not the highest, in order to find the best fit for the clients and the staff. Our goal is to help both parties agree to terms that they find to be fair and reasonable.”

This article was originally published on Financial-Planning.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© 2016 SourceMedia, Inc. All rights reserved. Content originally published in Financial Planning. No further distribution, reuse, or republication permitted without the written consent of SourceMedia Inc. For more from Financial Planning, go to: http://www.financial-planning.com/.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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