The research, analysis, and writing for this report were conducted in concert with the following ECHELON professionals: Tyler Resh Vice President

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2 Authorship The research, analysis, and writing for this report were conducted in concert with the following ECHELON professionals: Daniel Seivert CEO and Managing Partner Aaron Jackman Analyst Tyler Resh Vice President Eric Monroe Analyst ECHELON Partners 1500 Rosecrans Avenue, Ste. 414 Manhattan Beach, CA Tel: About ECHELON Partners ECHELON Partners (ECHELON) was formed in 2001 to offer investment banking and consulting to the wealth and investment management industries. Since that time, ECHELON s professionals have helped hundreds of senior executives envision, initiate, and execute a multitude of complex business strategies and transactions. In short, ECHELON has helped these executives make the big decisions with respect to M&A, capital raising, investing, divesting, strategy, corporate development, and corporate governance. ECHELON s clients range in size from closely held investment advisory practices to global financial institutions, and range in maturity from start-ups to firms with more than 100 years of operating history. ECHELON s business is making companies more valuable by delivering advice and orchestrating transactions. Accordingly, ECHELON measures its success in the enterprise value it creates for its clients. Companies that strive to outperform their peers choose to work with ECHELON because it is as passionate about their results as they are. Request a Complete Copy of the Report To request a complete copy of the How to Guide on Continuity Planning report, contact your TD Ameritrade Institutional Strategic Relationship Consultant or call

3 Table of Contents Section A: Introduction 1. Definition of Continuity Planning Why Continuity Planning Is Important The Right Time to Enact a Continuity Plan 9 Section B: Develop and Implement a Continuity Plan Step 1. Lay the Foundation Step 2. Define the Triggering Events.. 15 Step 3. Develop the Practice Continuity Agreements.. 17 Step 4. Identify Your Potential Continuity Partner 22 Step 5. Conduct Due Diligence Step 6. Negotiate and Execute Written Agreements Step 7. Address Client-Related Issues 29 Step 8. Prepare Your Continuity Partner to Serve. 31 Section C: Common Mistakes. 33 Section D: Keys to Success

4 List of Exhibits Exhibit 1: Continuity Planning vs. Succession Planning. 6 Exhibit 2: When Catastrophe Strikes a Firm without a Continuity Plan.. 7 Exhibit 3: When Catastrophe Strikes a Firm with a Continuity Plan.. 8 Exhibit 4: ECHELON s 8-Step Continuity Planning Process 10 Exhibit 5: Third Party Overseer 12 Exhibit 6: Example of the Contents of a Continuity Manual.. 13 Exhibit 7: Sequence of Events Following Triggering Events Exhibit 8: Restrictive Covenants: Non-competition vs. Non-solicitation 18 Exhibit 9: Cross-Purchase, Redemption, and Hybrid Buy-Sell Agreements 21 Exhibit 10: Assessing a Candidate for Continuity Partner. 23 Exhibit 11: Conducting Due Diligence on an External Continuity Partner. 26 Exhibit 12: Possible Compensation Arrangements 28 How-To Guide on Continuity Planning Copyright 2009 ECHELON Partners. All rights reserved. No part of this publication may be reproduced or retransmitted in any form or by any means, including but not limited to electronic, mechanical, photocopying, recording, or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs, and attorney s fees. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The publisher can accept no responsibility for such information or for loss or damage caused by any use thereof. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is not to be construed as a solicitation or any offer to buy or sell any securities or related financial instruments. TD Ameritrade and ECHELON Partners are separate and unaffiliated and are not responsible for each other s policies or services. Access to ECHELON s program is provided by TD Ameritrade Institutional as a service to financial advisors using the brokerage, execution, and custody services of TD Ameritrade Institutional. TD Ameritrade does not guarantee nor is it responsible for the completeness or accuracy of the data provided or for the quality of any product or service. TD Ameritrade makes no warranty or representation with respect to the service as to suitability or fitness for a particular purpose. In no instance should the listing of a third party be construed as a recommendation or endorsement by TD Ameritrade. TD Ameritrade Institutional, Division of TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc., and The Toronto-Dominion Bank. Used with permission.

5 H O W - T O G U I D E O N C O N T I N U I T Y P L A N N I N G Section A: Introduction Continuity planning, like its close relative, succession planning, is an endeavor that many wealth managers know they have to address at some point but often never get around to designing, drawing up, and implementing. As a result, they unwittingly put their firms and beneficiaries at risk by neglecting to prepare their practices for the unthinkable, such as the firm owner s death or disability. As you might expect, the consequences of not adequately preparing for catastrophes such as this can be dire, ranging from disruptions in client service to significant decreases in the value of a practice. Thus, it is absolutely vital for every wealth manager not only to recognize the need for a continuity plan but to make a concerted effort to put one in place immediately. In this introduction, we will define what continuity planning means, from conception to realization. We will also address why it is important and when wealth managers should begin to develop their plans. 1. Definition of Continuity Planning The definition of continuity planning is often tied in with that of succession planning, and, indeed, they share the same basic goal of providing for the transition of ownership in a firm at a certain point in time. However, while a succession plan provides an owner s planned retirement, a continuity plan takes care of near-term unexpected disruptions in an owner s life. As such, a continuity plan requires a pre-appointed continuity partner or continuity provider to suddenly and perhaps temporarily take the helm of a firm in the event of a catastrophe. A continuity plan can often serve as the baseline for a succession plan, but continuity planning is distinguished from succession planning by its short-term nature, universal requirement for firms, and need for immediate implementation. To see an illustration of this comparison, see Exhibit 1. Page 5

6 H O W - T O G U I D E O N C O N T I N U I T Y P L A N N I N G Exhibit 1 Continuity Planning vs. Succession Planning Definition Who needs it When it is needed Continuity Plan A short-term plan that provides for a previously selected successor to take over your firm immediately in the event of a catastrophe (death, disability, disaster, etc.) All advisors who own equity Immediately Succession Plan* A long-term plan that focuses on developing a formal course of action for the owner s retirement or known departure from the firm and provides for an eventual sale to an internal or external candidate All advisors except those who (1) already have a plan in place to sell their practice; (2) want to gradually wind down their practice rather than sell it; (3) plan to retire in less than five years and only have time for a quick external sale, or (4) plan to retire in more than ten years and do not want to prematurely choose a plan and successor Approximately five years before your planned sale of your equity * For a more detailed exploration of succession plans, please see the How-To Guide on Succession Planning. Source: ECHELON Partners. A continuity plan is also different from a disaster recovery plan in that the latter outlines the process for resuming practice operations following both natural and man-made disasters. Since the two types of plans share many of the same considerations, such as preparing employees and communicating with clients both in preparation for and following a catastrophe, we will consider the disaster recovery plan to be a subset of the continuity plan. 2. Why Continuity Planning Is Important A continuity plan is, without a doubt, one of the most important things an advisor can set into place for his or her firm. In order to illustrate this, we need not look further than the sequence of events that would unfold if a catastrophe happened to a firm without a continuity plan. Suppose a wealth manager (with $100 million in AUM and three support professionals) suffered a sudden stroke that left the firm with no clear indication when, or even if, he would be able to fully recover. What would happen to his business, clients, employees, or even his family? Indeed, when a catastrophe happens to a firm without a continuity plan, considerable disruptions to firm operations and other problems start to occur before the dust has even settled. For an illustration of this unfortunate sequence of events, see Exhibit 2 below. Page 6

7 H O W - T O G U I D E O N C O N T I N U I T Y P L A N N I N G Exhibit 2 When Catastrophe Strikes a Firm without a Continuity Plan A wealth manager/owner without a continuity plan will go through the following sequence of events upon the occurrence of a triggering event such as a death, disaster, or disability: Wealth Manager/Owner without Continuity Plan Triggering Event Occurs Continuity Disruption and Problems Death Disaster Disability Source: ECHELON Partners. By failing to put a continuity plan in place, the aforementioned wealth manager left his practice vulnerable. Even if he managed to make a full recovery, his practice might never do the same. The following are just some of the problems that a firm could face, upon the occurrence of a disaster, without a continuity plan: Disruption to client service Harm to outside investors Regulatory actions and/or private litigation Irreparable damage to business reputation Vulnerability of spouse, children, and other dependents Defection of employees along with clients Subjection to market climate Loss of client base Fewer liquidity options upon exit from business Devaluing of practice If the above list seems to read like an Armageddon scenario for a financial advisory practice, that is because the consequences for a firm without a continuity plan can be particularly disastrous once a catastrophe occurs. Small firms in particular are highly Page 7

8 H O W - T O G U I D E O N C O N T I N U I T Y P L A N N I N G susceptible, since they often do not have the luxury of internal team members who can bridge the gap, as in a larger firm. However, it does not have to end this way. In fact, a firm with a continuity plan in place will follow a much different sequence of events upon the occurrence of a catastrophe. Let s suppose this same wealth manager had worked with professionals to draw up a continuity plan in advance and had chosen a wellqualified industry peer as his continuity partner shortly after starting his practice. Once previously only conceptualized, the catastrophe and its occurrence now allow the continuity plan to be realized. Indeed, instead of myriad disruptions and other problems afflicting the firm, the well-prepared continuity partner can immediately take over, either temporarily overseeing the firm until the owner returns or arranging for the sale of the practice with a hired professional in the event that the owner cannot return. In the meantime, the firm retains its clients and employees and maintains its business reputation and value. For an illustration of the sequence of events followed by a firm with a continuity plan, see Exhibit 3 below. Exhibit 3 When Catastrophe Strikes a Firm with a Continuity Plan A wealth manager/owner with a continuity plan will go through the following sequence of events upon the occurrence of a triggering event such as a death, disaster, or disability: Practice Sold to Continuity Partner Wealth Manager/Owner with Continuity Plan Triggering Event Occurs Required purchase and terms First right of refusal Keep Pass Investment Bank Hired to Sell Practice Death Disaster Disability Continuity Partner Does Temporary Consulting Internal (employees, partners) External (continuity partner, unknown) Fees Engagement agreement Accountability person Practice Resumed by Wealth Manager/Owner Source: ECHELON Partners. Also, even if you never have to implement your continuity plan, simply having one in Page 8

9 H O W - T O G U I D E O N C O N T I N U I T Y P L A N N I N G place can offer a variety of benefits to a wealth manager s practice, including: Peace of mind for you, your spouse and children, and your clients and employees A value-added relationship with the continuity partner More liquidity options upon exit from the business Prepared employees A value-added relationship with the continuity partner Impetus to seek out another peer in the industry Increased valuation of your practice In summary, it is clear that the risks of not having a continuity plan in place are severe, and even if a catastrophe never occurs and your continuity plan never has to be put in place, you can feel secure in the fact that you, your clients, and your employees are prepared for anything that life throws your way. 3. The Right Time to Enact a Continuity Plan All wealth managers must begin to formulate their continuity plans immediately if they have not already done so. After making yourself knowledgeable about the subject by reading this How-To Guide, schedule the time to start developing a plan of action (see Step 1 for more) and a list of possible continuity partners. So, with no reason to put it off any longer, you should endeavor to begin your continuity plan now. Page 9

10 About the How-To Guides ECHELON Partners Has Developed a Series of How-To Guides The guides are designed to help wealth managers capitalize on some of the most important firm-development opportunities available today. The Focus Is Advanced Firm Development as Opposed to Core Practice Management Topics Most advisors spend the vast majority of their time on core practice management, which consists of product selection, client service, staffing, accounting, compliance, finance, sales, marketing, partnerships, research, technology, and operations. Beyond these shorter-term and often-urgent concerns are a host of longer-term, important concerns that successful wealth managers must find the time to address. Often referred to as advanced firm development initiatives, they include strategy, governance, M&A (i.e., buying and selling), succession planning, management development, performance evaluation, equity compensation, valuation, and business models. The Guides Are Specifically Designed for Wealth Managers The challenges of organic growth in the wealth management industry are surpassed only by the difficulty of evaluating and implementing the plethora of solutions being offered to overcome them. On the other end of the spectrum, there is a relative dearth of resources to help wealth managers succeed with alternative growth. Those resources that do exist are not particularly user friendly and/or are not designed for wealth managers. The How- To Guides are specifically designed to bridge this gap. These Are the Best of Times to Address Alternative Growth These guides are important because they help wealth managers master subjects that are essential to maximizing the success and valuation of their firm. The guides also fill some key voids in the area of practice management subjects that are overlooked by many who do not appreciate their importance. To a large extent these are the best of times to make progress with many of these alternative growth topics. TDAI /09

11 ECHELON Partners 1500 Rosecrans Avenue, Ste. 414 Manhattan Beach, CA