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Practice Planning

The DOL Fiduciary Rule: An Opportunity to Reevaluate Your Succession Plan

With the DOL’s fiduciary rule on retirement advice now public, many financial advisors are taking a hard look at their businesses and determining the best way to adjust to the rule’s requirements. Advisors who own their firms should also take this opportunity to think through how they can ultimately develop a sound succession plan in light of new factors brought about due to the DOL rule. While many of the considerations remain the same, there are new factors to take into account given the expected widespread transition from commission-based to fee-based products.

Here’s how advisors can create a succession plan that ensures the continuity of their firm and their ability to harness its full financial value in the post-DOL rule world.

Goals-Based Planning

Given that the DOL rule is fundamentally changing the financial advising landscape, advisors need to reevaluate their long-term goals and succession plan. First and foremost, they need to reassess when they want to retire. Advisors serving smaller clients and those who exclusively sell commission-based products are expected to struggle under the new rule’s provisions, potentially leading some to retire earlier than they expected. On the other hand, advisors who decide to remain in business still need to think through when they want to sell their firm and the type of compensation they want to receive. This involves assessing whether they want a one-time lump sum for the sale or would prefer yearly payments over an extended period of time. Sorting through these critical questions will empower an advisor to create a comprehensive succession plan that aligns with their long-term goals and takes into account the new realities of the DOL rule. Regardless of what type of succession plan they choose, there is significant preparation required, so it’s important that advisors address these questions sooner rather than later.

Finding the Right Buyer

Once advisors decide when they want to sell, they then need to decide on an appropriate buyer. In fact, there are unique considerations and factors advisors need to take into account depending on whether they are pursuing an external or internal succession, meaning whether they sell the company to an outside party or sell it internally to select employees.

If an advisor chooses to pursue an external strategy, s/he must identify and vet potential buyers, which can take between one and three years. Given that an external sale is typically a one-time event, where the owner gives up total control of the company, this vetting process is particularly important. In fact, finding the right buyer requires more than just reaching an agreed-upon sale price. Advisors should also ensure that the buyer’s business model is similar, which will allow for a seamless transition and put former employees in a position to succeed.

Take the hypothetical example of a fee-based firm purchasing a commission-based firm. In that scenario, advisors working for the acquired company would likely face significant obstacles as they attempt to change their compensation structure, especially given the DOL rule.

On the other end of the spectrum, internal successions require a different set of considerations and preparation. With an internal succession, an advisor needs to identify employees capable of taking over the business and then groom those individuals, which can take up to 5-10 years to execute. Once an advisor decides upon potential successors, he or she should begin to incentivize those employees to stay at the firm and eventually take control. To do so, advisors will often offer small equity stakes in the company to those employees, tying them to the firm for an extended period of time.

Another tactic is to establish a deferred compensation structure, whereby part of an employee’s salary is placed in a fund each year, which s/he can draw upon when it is time to purchase the company. This is a particularly effective tactic given that employees often struggle to come up with enough capital to purchase a firm from their employer outright.

Continuity Is Critical

DOL rule or no DOL rule, at the absolute minimum, an advisor should establish a continuity agreement with another advisor, which ensures that both advisors’ firms will continue on in the event of a death or medical emergency. In most cases, a continuity agreement states that if either advisor passes away, the other one will take control of both firms. There are a number of ways that the surviving advisor can take control of the firm, including purchasing it at once or paying a determined yearly income to the deceased advisor’s family. It is critical to make sure that the exact buyout terms are clearly agreed upon and stated in a continuity agreement so that there are no surprises. In addition, advisors need to consistently update the agreement so that it accurately reflects the value of both firms, as well as the current client roster.

The DOL rule is leading many advisors to examine their business more closely and reassess their succession plans. By reevaluating their long-term goals in the context of this rule and taking into account the main considerations for any succession plan, advisors can create a plan that puts them in a position to reap the financial rewards from their business.


Matt Matrisian is Senior Vice President, Practice Management & Strategic Initiatives at AssetMark, Inc. @AssetMark.

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