Financial advisors spend a significant amount of time planning for their clients’ futures. But planning for their own futures is often an afterthought; data shows the majority of advisors lack a succession or continuity plan. Cetera Financial Group has launched a new program to help its advisors develop formal continuity and succession plans, especially in unplanned situations, such as an FA’s sudden death or early onset dementia.
“The old phrase ‘the cobbler’s children wear no shoes’ is very apt with a financial advisor, meaning that many of them as independent business owners have not gone through a formal continuity or succession planning process,” said Richard Whitworth, head of business consulting for Cetera. “We need to do a better job at the end of that advisor’s life cycle when they look to monetize the business and exit.”
Succession planning has long been a large part of Cetera’s business consulting; since 2015, the firm has facilitated about 300 acquisitions for advisors across its broker/dealers, 90% of which were internal within the network. The firm has been providing book and business analytics to help advisors grow their practices or better manage expenses. The firm has also provided financing to make deals between practices happen.
But the new Legacy Builder Program is more comprehensive. Now, every Cetera advisor will have access to an online valuation tool, through a new partnership with Truelytics. That tool goes beyond just revenue multipliers of fees versus commissions. Advisors input their revenue, costs and client demographic information to get a discounted cash flow valuation for their business. The firm will then help advisors increase their business’s value.
“Maybe you didn’t have employment agreements in place with your key staff people,” Whitworth said. “That’s detracting of your firm because, theoretically, they could solicit clients.”
Another component of the program would require the advisor to enter into a formal agreement with Cetera Financial to create a continuity plan in the case of an unplanned exit. The firm will partner them with another advisor, a “qualified buyer” so to speak, and then take that advisor through a practice management exercise to maximize the value of their business prior to that unplanned, triggering event. For instance, if an advisor doesn’t use a customer relationship management system, the firm may suggest they put one in place to ease the transferability of the business between two partners.
“We know the value of an advisor’s practice—without having a continuity partner named and identified and communicated with the client—over the first 60 to 90 days, the vast majority of the value of that firm disappears, because the clients don’t have anyone to call,” Whitworth said.
If that event does happen and a buyer has been identified, Cetera would facilitate the financing of the acquisition by that buyer. If the event happens and no buyer was identified—a rare occurrence—Cetera would step in and buy that book of business. The firm would stabilize the business and then look to resell it through another Cetera advisor.
“This becomes that business insurance.”
Unfortunately, these types of unplanned exits do occur. About five years ago, a Cetera advisor passed away from a motorcycle accident; he had two young children. Another advisor had congenital heart disease and ended up having two heart transplants; he’s now OK and still a practicing advisor. In these two situations, the firm stepped in to make sure the clients were being taken care of. “There was no disruption in the client service.”
The Legacy Builder Program also includes a planned exit strategy, where the advisor would provide the firm with a target date for their retirement. The firm will help him or her increase the value of their practice, and it will also identify a buyer or next generation owner, if that’s the case. If a buyer or next gen owner is identified, Cetera will help facilitate the financing and transaction. If no buyer or next gen owner is identified, the firm will buy the book and then look to resell it to a younger, more planning-focused advisor.
Legacy Builder also features a qualified buyer program. These are advisors within the Cetera network of firms who have had success buying books of business in the past. In fact, they make up the vast majority of the 300 acquisitions Whitworth’s teams have facilitated since 2015.
“Advisors who are interested in being that counterparty to one of the program participants can enter into a qualified buyer program, where basically they will be the ones we will look first to match an advisor with,” he said. “Those firms know, because they’re interested in growth through acquisition, that they have a time line of when they can obtain more of that inorganic growth, versus their normal run-rate organic growth that they do.”
Whitworth believes the effort will help advisors with one of the biggest challenges they face in planning for their future—finding the right successor. The firm has about 8,000 advisors who have to solve for this.
“Our network is wide enough where we believe we can partner people together with the best business model fit.”