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Planning for a Digital Legacy

Increasingly, the digital property of financial planners and their clients is up in the clouds, somewhere or another.

It turns out that the intersection between our mortality and the immortality of our digital property has become an important part of the estate planning process. That’s right—not only do you need to make plans for your tangible assets, but you also need to make plans for your email, social media, banking and financial accounts (investments, of course, but also things like bitcoin and PayPal), online memorabilia and documents; not to mention all those pictures, which at the time seemed artistic, but now just make up an ever-lengthening feed of status updates.

It’s important to know that a person’s digital property and electronic communications are referred to as “digital assets” and the companies that store those assets on their servers are referred to as “custodians.” The reason this matters is that these digital assets are usually governed by a terms of service agreement rather than by property law, and in many cases these agreements are silent when it comes to digital assets after Internet users pass or become incapacitated.

The other problem is the sheer number of online accounts we have today. Some estimates show that each American has, on average, 130 online accounts and that this number could grow to 207 by 2020.

What Now?

Fortunately, many states have enacted a measure to help simplify this issue. The Revised Uniform Fiduciary Access to Digital Assets Act (UFADAA) allows a fiduciary the legal authority to manage another’s property and specifically allows Internet users the power to plan for the management and disposition of their digital assets. At this point, all but 8 states have enacted this or a similar law, but it’s likely that every state will pass a law regarding fiduciary access to digital assets in the near future.

The action steps are to include the idea of digital assets in your normal estate planning and wealth transfer conversations with families. Along with that, you should include an amendment to a client’s existing will, trust or power of attorney which gives the designated agent the authority to direct or dispose of these assets. This amendment may take the form of a Virtual Asset Instruction Letter (VAIL) which allows one to list accounts, instructions for those accounts and the person(s) designated to access those accounts.

While many may doubt the urgency of this legislation, even the most Internet-resistant person can’t help but admit that our lives are becoming more and more digital. The assets that are housed in the cloud have value. Airline miles or hotel points have obvious monetary value, and others like pictures, emails or creative works have mostly sentimental value. The important thing to remember is that a person’s legacy is made up of both sides of that coin.

So even though that Luddite client may scoff at this idea, it has become an important part of the estate planning process. I’m sure that after having this conversation, that client will provide a status update to all their Facebook friends letting them know how happy they are to have had it.

Editor’s note: A version of this post appeared on the Janus Henderson blog. You can find it here.

Ben Rizzuto

Ben Rizzuto, CFS, is a retirement director for the Defined Contribution and Wealth Advisor Services Group. In his position Rizzuto works with financial advisers, platform partners, Janus Henderson colleagues and clients to find solutions for today’s increasingly difficult retirement issues, whether they be within retirement plans or for those clients that are trying to figure out how to retire on their own terms. He also contributes to the dialogue surrounding these issues as the host of the “Plan Talk” podcast and through periodic posts to the Janus Henderson Blog.


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Dos and Don’ts of Passing Down Your Practice

The average age of financial advisers in the U.S. has climbed north of 50 years old and approximately 43 percent of the total population of advisers are between ages 55 and 60. With so many advisers nearing retirement, the industry is facing a crisis when it comes to succession planning.

Typically, when the owner of a financial advisory practice wishes to retire, they’re faced with one of two choices: they can sell their firm to an institutional buyer, such as an RIA rollup shop, private equity firm or a regional acquirer; or they can bring in a junior partner and gradually introduce them to his or her clients and transition the book of business over bit by bit.

Ideally, firm owners prefer to transition their book of business to a junior partner over a five- to 10-year period. However, throughout my career helping small business owners transfer ownership of their firm and retire, I have found that financial planners ironically have some of the worst track records when it comes to successfully planning and executing an ownership transfer.

In this light, here are a few dos and don’ts when transitioning ownership of your business to a younger partner:

Don’t delay. It’s never too early to start the succession planning process, which can take more than a decade from start to finish. It takes years to introduce a new partner and provide them with the training and resources necessary to keep the business afloat. Too often do I see advisers continue to work into their senior years only to realize they have no exit strategy in place. Consider your clients; who is going to take care of them after you leave? And how are you going to monetize the business you’ve worked to build over the course of a lifetime?

Do get your younger partner involved in discussions and meetings with your larger, more significant clients throughout the transition process. Junior partners are typically brought on initially to handle an adviser’s smaller accounts. While this is all good and well in the beginning, it does not provide the new owner with the proper experience and training required to serve the bigger clients, which will be one of their primary responsibilities once ownership is transferred.

Don’t forget about the intangibles like the management style, likeability and cultural fit of the new owner. Some financial advisers still run a very formal shop with pressed white shirts and systemized client communication techniques. Others are more comfortable in khakis and a polo shirt, and prefer a more casual style of correspondence with clients. Also, does your new partner fit in well with other employees at the firm? Making sure you two see eye to eye in these categories can really smooth out the transition process, both for yourself and your clients.

Do go over the company’s financials. Not only must you teach the new partner how to handle your clients, you must also teach them how to run a business. What size client is most profitable? How does the business manage its costs? How do we manage the staff? Many new business owners overlook these extra responsibilities, which can be overwhelming at first. But as the outgoing partner, you need to make sure the business is left in a position to remain profitable. Typically, selling advisers are paid out in installments. If the business fails, these payments could stop, leaving the outgoing adviser in a sticky situation.

Don’t think you won’t need outside help. Hire a team of lawyers, accountants and even a management consultant to delegate the distribution of responsibilities throughout the process. Many times the incoming owner wishes to take over more responsibility at a faster pace than the retiring adviser is comfortable with. Management consultants go a long way in easing this tension.

Do be open to some degree of change. Relinquishing your power and watching the business you spent years creating change in front of your eyes can be a difficult pill to swallow. However, standing in the way of the new adviser’s vision will only muddy the process. You must accept that some aspects of your business are going to change under new ownership. The sooner you come to terms with this reality, the better.

No matter how much you plan, transitioning your business will almost inevitably come with a few bumps in the road. However, following this list of dos and don’ts will put your firm in a much better position to smoothly and successfully navigate the transition. Many of your clients have worked with you for decades, and you owe it to them as their financial adviser to ensure their financial futures are maintained. The first step in doing so is to make sure your business is taken care of after you’re gone. So take this transition process seriously and start early. Your clients’ well-being depends on it.

 

Stephen Brubaker

Stephen Brubaker CFP® is president and wealth management adviser at Exit & Retirement Strategies, Inc. He holds his bachelor of science from Miami University in Oxford, Ohio.

 


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Building Growth Through Succession Planning

Succession planning isn’t just an “end-game strategy”; it is the key to growth and sustainability.

The specific goals of the succession planning process depend on the founder and his or her circumstance—including age, health and family demands—and they vary case by case. The point, though, is to take a methodical and practical approach to building a business that will endure beyond the builder. Four key areas to concentrate on are:

  1. Building strong, sustainable growth;
  2. Creating a focus on the bottom-line;
  3. Implementing a practical and reliable continuity plan; and
  4. Designing an income perpetuation strategy for the founding owner

The first is perhaps the most important. Building strong, sustainable growth for the business is supported by a clear succession plan in two ways. First, by incorporating next generation advisers who will be investing financially and physically as they buy in. One of the most effective ways to grow a business is to help the next generation build on the foundation the founder has already created and gradually transition ownership—and leadership. The next generation will learn not only how to “think like an owner,” but to be an owner. They will connect the daily goal of revenue production with the long-term goal of producing sustainable revenue in an efficient and scalable manner. They will make decisions that benefit the whole, not just themselves.

Second, growth through succession is about even more than just improving numbers. Strong, sustainable growth demands that the business owner increase their own capabilities as a leader—not just as a producer. As an executive of a multi-generational business, building the strength and depth of the entire team fuels continuous growth.

Cultivating ongoing growth in this way allows a founder to realize exponential value in the business they’ve built, while allowing them to plan for life after advising without worrying about the future of the business or the clients.

Unless the world of professional financial advisers discovers immortality or the fountain of youth, 100 percent of today’s advisers will see their careers come to an end, one way or the other. The only question is how you’ll help your clients transition from your advice and care to someone else’s. Will it be through a professional and carefully crafted succession plan; a last-minute sale to a friend or colleague; or will the clients be left to fend for themselves?

Building a business is about building for the future—your future and your clients’ futures. With a solid succession plan you not only promote growth—you build a legacy, and most importantly, you provide for your clients’ needs beyond the length of your individual career.

david_grau_sr

 

David Grau Sr., J.D.
President and Founder
FP Transitions
Lake Oswego, Ore.