With the announcement of Supreme Court Justice John Paul Stevens' retirement earlier this year, President Barack Obama was faced with the weighty task of selecting someone to fill the impending vacancy in the highest judicial body in the country. In recent years, it has become common for these presidential appointments to endure speculation and scrutiny from members of Congress, lobbyists and media talking heads. Elena Kagan was no exception. Yet, ultimately, President Obama, as with his predecessors, needed only to weigh the factors most pertinent to serving on the Supreme Court-constitutional philosophy and judicial temperament.

Similarly, it is common for executives of wealth management firms who are in the process of developing succession plans to become bogged down by all of the considerations that go into selecting a potential successor. With so much of the success of the plan hinging on this decision, it is important to make a clear and informed choice, focusing on the attributes most vital to perpetuating the success of the firm.

Sometimes wealth managers do not have to look far to find this ideal successor. For example, a wealth manager might have a child or a close associate whom he or she has been grooming to take over the firm. Other times, wealth managers may find that no clear candidates for succession have emerged within their firm, and they must look to recruit an outside partner who will be capable of eventually succeeding them.

THE FAMILY MEMBER

Many wealth managers, especially those interested in carrying on the legacy of their firms, elect to pursue family succession as a way to transition their firm to the next generation. This approach has its advantages, such as increasing the comfort level of clients when they see their financial advisors go through the same things they do. Wealth management firms with multiple family members working together in harmony will not deny that this arrangement can also be an effective marketing tool.

If you elect to proceed with selecting a family member as your successor, the transition itself will proceed like an internal succession involving an employee or partner. Common steps include preparing for the succession in advance and laying out future roles within the firm. In fact, if you proceed with a traditional sale of your firm to a family member, perhaps providing him or her with rights of first opportunity, the implementation of the entire plan would be identical to the transfer of ownership to an employee or partner.

Although a traditional sale is always a legitimate option, in most cases wealth managers want to transfer ownership to their family member gradually through a gifting program, while using valuation discounts to contain the value of the practice for capital gains and estate-tax purposes. They may also want to sell discounted shares of the practice gradually to the family member. The most common and tax-effective ways of transferring ownership to a family member include establishing an intentionally defective grantor trust (IDGT), forming a family limited partnership (FLP) and providing lifetime gifts.

Ideally, you would want to enact your plan for family succession as soon as possible, because that would allow you to pick the perfect time to gift the bulk of the practice-when its value is likely to be at its lowest point. Yet wealth managers are usually unable to get the timing right; as a result, taxes end up being a central issue to family succession. Consequently, you should consult a tax professional to determine the best arrangement for you, your family members and your firm.

THE INTERNAL PARTNER

The first instinct of many wealth managers is to select a key employee or partner as their eventual successor. Not only have owners likely developed a rapport with key members of the firm, but these key employees and associates also likely have institutional knowledge of client accounts and firm culture, and they can provide consistency from one generation to the next. Moreover, the firm's clients and other employees will be less likely to leave if they know that someone with whom they are familiar will be taking your place after you leave.

However, there can be disadvantages to insisting on an internal candidate as your eventual successor. First, many sole practitioners lack staff with the requisite qualifications to serve as successor. In order to service client accounts effectively and legally after your departure, the candidate must have the right education, licenses and designations.

Similarly, many internal candidates may lack the entrepreneurial drive, leadership and management skills and investment management capabilities that come from years of leading a firm as a wealth manager. Finally, many employees may lack the financial wherewithal to buy the firm, forcing you to increase your risk, decrease your sale price or unattractively narrow your exit options by heavily financing the deal with promissory notes and earn-outs.