Having a continuity partner in your practice is important to ensure continued service, staff involvement in the transition, and financial protection for your family in the event you are unable to participate in the business. Without one, you run the risk of creating service disruptions, staff confusion, and unnecessary family stress. Plus, in the event of permanent disability or death when there isn’t a continuity agreement in place, fiduciary accounts are stripped of fees and converted to brokerage accounts immediately. In short order, your revenue stream may significantly decline. Ultimately, for an independent advisor, this disruption of income often results in diminished client retention and a business fire sale.
So, where do you begin? In some ways, seeking the optimal continuity partner is not much different from finding a life partner. Over the years, I’ve observed at least three distinct approaches to finding a continuity partner that correspond to strategies similar to what we find in the dating game.
Swipe Left or Right
If you’re like many advisors, you may prefer a simple approach like that offered by Tinder. In case you are unfamiliar with this digital date-seeking experience, let me briefly explain the Tinder app. Individuals looking for dates upload photos of themselves for review; reviewers then go through the photos, swiping left (not a match) or right (potential match) according to their interest.
Tinder is quick, easy, and potentially yields fast results. When looking for a continuity partner, you can use a similar strategy. First, request a list of local advisors and their contact information from your broker/dealer. Then, research their firm websites; if someone’s professional profile “looks good,” reach out to him or her to gauge interest in a partnership. This approach can be especially useful if you’re new to a geographical area or to a firm. It’s also perfect if you want to practice talking to other advisors about joining as continuity partners, without the embarrassment of imposing on a colleague you know well.
One important point to keep in mind here: by selecting a partner based on a surface profile, you may miss aspects of the practice that do not align with your client, staff, and family needs. This approach is unlikely to yield long-term results unless both parties are willing to put in the time to make it work.
Compatibility Matching
The next strategy relies on the power of algorithms to make personal connections. These algorithms are behind the dozens of websites, including Match.com, eHarmony, OkCupid, and Delightful.com, that aspire to help potential mates find a match based on common criteria. Each takes a slightly different approach and appeals to a particular market. But for most of these sites, the key to making a match is finding common ground.
In a similar vein, it’s worthwhile for you to find common ground with your potential continuity partner by performing your due diligence before agreeing to a binding legal contract. By doing an extensive analysis of another’s practice, you can find a partner and firm that aligns with you and your practice. Here are just a few areas to consider:
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Number of clients and households, average household size, and so forth: This information provides a high-level gauge of the time and effort required to service the client base. It also helps a buyer determine if he or she will be able to successfully absorb the purchased practice.
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Revenue and production: These figures provide valuable information for a pro forma estimate of inflows. In general, three years of numbers can tell the story of a practice’s growth.
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Trailing 12-month revenue by type: Advisory recurring, non-advisory recurring, and non-recurring revenue streams may represent opportunities, as well as challenges, for the buying advisor.
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Practice focus: Does your practice focus on comprehensive financial planning, transactions, investment management, insurance, or fee-only? An incompatible approach to clients tends to decrease retention, although there may be opportunities for conversion.
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Client niche (if any): Niche clients typically demand specialized knowledge and sensitivity that the buying advisor may or may not possess.
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Staff considerations: In the event of disability or death, will the staff be ready and able to step in? Will they stay beyond the tenure of the departing advisor? Will the buyer need them in a transition? Will the buyer be willing to keep staff on? Will the staff integrate well?
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Office efficiency: Will the office continue to run without the departing advisor? Are there repeatable processes? Are they compatible with the buyer’s processes? Are there written procedures, including disaster recovery procedures?
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Geographic dispersion: Location can affect scalability and generally is seen as a liability in a practice.
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Compliance record of the selling advisor: What will the buying advisor be inheriting?
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Client age: What is the broad picture of clients in terms of accumulating, maintaining, and harvesting investment savings?
As with any good match, you will not be compatible in all of these areas. But being aligned in as many as possible puts the odds in your favor of a long-term connection that makes sense for you, as well as for your staff, clients, and family.
Introductions
Sometimes, there’s no substitute for an old-fashioned, low-tech introduction. Your friends and associates often know you well enough to introduce you to the kind of person with whom you are likely to be compatible, or at least someone you will like! Similarly, a good way to meet a potential continuity partner is to simply ask your colleagues, home office staff, and business associates if they know of someone who may be willing to serve as your backup and, ultimately, buy your business.
The Commonwealth Way
Here at Commonwealth, the Practice Management team collaborates with affiliated advisors and prepares more than 100 continuity plans every year. Here are just some of the steps we take:
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Make introductions to other Commonwealth advisors and help analyze continuity compatibility.
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Maintain a resource bank of more than 300 Commonwealth firms willing and open to being a continuity partner.
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Develop checklists and agendas to help establish meaningful connections with potential continuity partners.
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Provide tools to analyze firms and to establish a range of market-realistic prices and terms.
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Prepare templates for buy-sell agreements.
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Review buy-sell agreements to ensure that they align with FINRA policies.
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Ease the transition with a dedicated Business Transitions Task Force.
Are You Ready?
Whatever strategy you decide on, remember that no method is perfect. But some tend to be better than others, given your specific circumstances and unique requirements. So, are you ready to jump into the dating pool?
