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Advice for Advisors on Legal Issues including Succession Planning, DOL & More…

  • By  Scott D. Calhoun
  • |
  • July 18, 2017

I recently read an article addressing key factors for financial advisors to consider when looking to retire, sell or merge their practice.

The article was well-written and focused on many important factors such as making sure that the new practice was a good fit for the advisor’s client base, taking care to structure the terms of the deal properly (looking at financing, valuation, and operational issues), and addressing important client transition issues.

Finally, the article mentioned the importance of preparing for the future by having valuations performed and updated on a regular basis and encouraging advisors to have resources in place to handle questions that may come up during a deal to sell or merge the practice.

Financial Advisor Consultant

This last point serves to emphasize advice I have passed along previously – that is, the importance of having a team in place to consider and address the wide range of issues involved in any potential business succession scenario.

Why Detailed Preparation is Key

Preparing for a potential sale or merger involves more than just having valuations in place and updated – the advisor should ensure that the financial statements are in order, existing contractual arrangements are either attractive or flexible (so that a potential buyer is not going to be subject to “bad” contracts or leases), and all corporate and other legal documents are in place and up to date. Having a solid team that works well together can make all this preparation easy.

These are all issues for a potential seller or advisor looking to retire or transition away for the practice. What about buyers? Whether an advisor is currently with a practice and has a potential opportunity to take over some or all of that practice or, instead, is looking to merge into or acquire a separate practice, similar issues must be considered, although from a different perspective. As with the seller, the buyer must be mindful of culture and “fit” issues.

Ultimately, no transaction will be successful if the clients, advisors, and operations folks are not compatible. But a buyer also must be concerned with potential liability issues, in addition to financing and practice profitability matters. Again, having the proper team in place can be essential in evaluating potential opportunities, whether internal or external.

The takeaway? The article I first mentioned above cited factors such as a changing regulatory environment and an upcoming generational shift in financial advisors to support the notion that nearly one-third of all currently practicing financial advisors will exit the business by 2024.

Potential sellers and buyers both need to be prepared to take proper advantage. Start planning now, and put your team together.

Other Key Updates for Financial Advisors:

DOL Fiduciary Rule: Although the rule is in effect (on a transitional basis), the Department of Labor has begun the process of re-examining the rule, and has taken the position that the class-action lawsuit feature of the regulation should not remain in effect. More to come. For now, though, the rule is in place, with limited enforcement.

Overtime Rule: The DOL has officially declined to defend the new standard and has begun the process of re-examining this rule as well. As I previously indicated, the salary threshold is ultimately likely to be raised, but not as significantly as the Obama Administration’s rule. This is also a work in progress.

Portability Election: The IRS has adopted a new procedure that permits a surviving spouse up to 2 years to file the election to take advantage of the deceased spouse unused exemption. This means that even if an estate tax return is not filed within 9 months (the normal deadline), a surviving spouse can still claim the exemption as long as the election is filed within 2 years (assuming that the estate of the first spouse was not otherwise required to file an estate tax return). With this new procedure, the IRS has issued helpful and clarifying guidance.

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Author Bio

Scott serves as Ironstone’s legal counsel and has more than 25 years’ experience in corporate law. He has a broad base of experience in the formation and structuring of all types of business entities and non-profit organizations as well as in mergers and acquisitions. Scott advises clients on a full range of business matters, including business entity formation, securities offerings, trademark registration and related agreements, lease negotiations, stock or asset acquisitions, employment agreements, partnership agreements, franchise agreements and related issues, secured lending or other financial transactions, shareholder agreements, and LLC operating agreements. Mr. Calhoun also has significant experience with estate planning, wills and trust drafting, and estate administration. Mr. Calhoun has served as general corporate counsel for a large number of small and medium size businesses. As corporate counsel, he advises clients on the full range of business legal matters described above, and he also consults on general business issues faced by those clients. His counsel also includes planning and implementation advice concerning asset protection and business succession issues, which often entails proper use of trusts and other planning vehicles. In the broader area of estate planning, Scott has significant experience with estate tax matters, drafting of wills, life insurance trusts, and other estate planning documents, and estate administration.