By: John P. Napolitano, CFP®, CPA, PFS, MST

Having a great, well thought out succession plan for your business shows a lot of care and respect for the people that you love and care about.

With a proper agreement, the beneficiaries will be your family, your staff, your clients and every supplier from your landlord to the office supply company that you use.

It isn’t hard, but there are many moving parts. You should think about valuation, funding, operations, regulation and compliance, contracts and ongoing client relationships. For purposes of this discussion, we will focus on the succession side of your wealth management business and not the traditional Certified Public Accountant (CPA) side. While in theory there are many similar issues, the value of the traditional CPA firm is disconnected (and far lower) from the value of the wealth management practice, and is commonly dealt with separately.

CPA’s are frequently at the epi-center of many peoples significant business decisions. Some topics are more fun to discuss than others, with succession planning usually not on the most favored subject list. It used to really shock me as I began to work on new cases where the client was in the saddle for a long time with a quality CPA firm, with a dysfunctional or non-existent succession plan. Now I’m used to it and assume (with great accuracy) that their CPA simply isn’t devoting the time to make sure that this is well planned and documented. But what really blows me away is the answer that I get when I ask a CPA Financial Planner about their own succession plan. Today we hope that you will begin the succession plan for your wealth management division.

The first step of a succession plan must be considered in the context of your key person not being there tomorrow. Harsh, but stuff happens, and we can’t do this for some possible future event. It needs to be done as if the unthinkable happens tomorrow. Bear in mind as you go through these exercises that a solution may not exist within your four walls today. We’ll talk more about this later, but it’s entirely possible that the components of your succession plan simply do not exist within the structure of your existing wealth management practice. That is no reason to avoid the issue, but cause for developing relationships outside of your own practice that may help.

To begin solving this issue, let’s start with the value of your wealth management firm. Rules of thumb regarding X times revenue are starting to become meaningless. The drivers of the valuation of a wealth management practice are many, including but not limited to factors such as the character of the revenue, the size of the firm in terms of staff and revenues, the amount of clients, the average revenue per client, the average age of clients, the average tenure or duration of a client, your relationship with the next generation of your clients, the service model utilized and the ‘Earnings Before Interest, Depreciation, Taxes and Amortization’ (EBIDTA) that your firm generates. The best way to recognize the value of your firm is to hire an independent valuation specialist to prepare the valuation report. This sounds familiar, doesn’t it? How often do you suggest this to a client to have it fall on deaf ears? But for yourself, this could be one of the best investments that you make this year.

The reason that a full valuation report is advised is for the information that is contained within. A simple estimation of value may get you a number that is near or even acceptable to all parties, but a full report will evaluate and score you in each of the significant valuation metrics. You’ll see firsthand from a valuation professional what you need to do in order to grow the value of your wealth management division. Priceless if you ask me.

Funding a succession agreement comes in many forms. There may be funding needed to buy out a deceased shareholder, replace a key person or to sustain the firm through a period that may include a slowdown in business development or a loss of key clients. What I ask of you is to take these issues seriously, and role play the loss of any key person to determine an appropriate amount of funding.  That funding can come through life insurance, cash reserves of the firm or future cash flow. But if you take the easy way out and simply make future cash flow the funding source, forecast the implications of such and ask if that is optimal.

When you’re looking beyond the financial side of a succession plan, you need to ensure that the business is as strong as possible the day after the dreaded event. From an operational perspective, make sure that the daily part of running the business is going to be functional. That means everything from assets you may be overseeing to client services in progress and meetings already on the calendar.  Examine how each key person on your team spends their time and have a backup plan in place.

Regulation and compliance is now a significant part of succession conversation. Regulators have made it clear that firms must include a functional succession plan as a part of their overall business continuity plan (BCP). Heretofore, BCP’s were typically referenced in terms of significant disruptions like disasters, power loss, computer issues, phone interruptions etc. Now, regulators have made it clear that the loss of an owner or key client service person should belong in the business continuity planning category.

Other significant issues regarding regulation and compliance may include the services of a chief compliance officer. If your key person is also your CCO, you need a backup. This can be tricky in that the newly designated CCO needs licensing and experience to serve in the role. This is another area where a relationship with another firm or a partner is helpful. In fact, in some partnerships you wouldn’t even need to have a CCO. They would provide that service as a part of your standard business relationship.

To the extent that your wealth management firm has a relationship with a broker dealer for commission based revenues, note that those revenues may only flow to a licensed individual and not to a firm. In order to protect the revenue flow from the loss of a licensed registered representative, you need a few things. You would need a second licensed person within the firm and an agreement on file with the broker dealer stating that the second licensee is to become the rep of record for any accounts of the deceased, disabled or retired former licensee. Of course, to the extent that this second licensee is not a partner or shareholder, you’d also need a separate employment agreement with that person stating their role and responsibilities with respect to client service and revenue flow. Even with these documents, many firms will still require a client signature to change the representative of record.

Some broker dealer agreements are clear that should a registered representative pass away without a succession agreement on file that the accounts of the deceased become house accounts of the broker dealer. Read your agreement and understand what your situation means to your family, partners and clients. I’ve heard some bizarre stories when inquiring about this, and must share what I felt was the most ridiculous. I was meeting a 75 year old accounting practitioner with a large list of C-share mutual-fund clients. When I inquired about his succession plan, he had not made any plans. When learning that his broker dealer (BD) firm would own his clients and his revenue stream in the event of his passing, he became curious and called them. The firm’s president told him not to worry, they’d allow his 75 year old wife to get licensed and then they’d transfer all of the clients back to her so she could sell the business. Wow! Do they really expect clients to wait for months so a 75 year old retiree can get licensed merely to sell the business? Unrealistic at best, and definitely not desirable from the client’s point of view.

Another issue worth considering in the succession of your wealth management business may be contracts and agreements in force with the former key player in your firm. May they be leases, bank loans, broker dealer or Registered Investment Advisor (RIA) agreements and custodial agreements; you need to ascertain that any contracts signed by the ‘deceased’ cannot cause a significant business interruption. Gather all such documents and contracts and understand the implications of a succession problem tomorrow.

In my opinion, the most significant issue for the succession of your wealth management practice are the ongoing client relationships. I can write a book on this topic alone– yet it would be more along the lines of practice management and what great client relationships should be like in the first place.

For starters, articulate your succession plan to clients. Don’t be fooled by their silence on the issue. Just because they haven’t asked about your succession plan doesn’t mean that they’re not thinking about it.  In fact, I’ve seen new clients in the past year because the client was concerned that their prior advisor was a small practitioner with no apparent succession strategy. To further my point, advisors in our firm who have articulated their succession strategy with clients have grown faster and received higher quality introductions to prospective clients than those who cannot articulate such a plan.

Next, ensure to have competent staff that interacts with clients often. It’s a mistake to hide staff from your clients. Hire well, be proud and take the mentoring of these other professionals seriously. If your clients feel well served by your staff today, they’re likely to feel well served by them after you’re gone.

If you’ve got a thin staff, or a largely administrative staff, this is another area where a strong partnership with another firm can help. Your clients love your small, boutique wealth management feel I’m sure.  But being a part of a larger firm with greater resources and the ability to help you with succession and other technical matters may really help.

If you already have a partnership and haven’t solved the succession issue, ask them why not. Consider a revocable, contingent succession agreement to cover all of the possibilities; death, disability, retirement, or loss of license(s). For those who need a partnership for succession or maybe more, get started today.  Finding a partner isn’t as difficult as it would be if you were trying to sell your practice today, but it is a similar evaluation process.


John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.

The experiences described in this material may not be reflective of your own situation. Your interactions may vary based on your professional relationships.