Advisers' deaths without transition plans force custodians into action

Custodians are stepping up their game at the same time regulators are putting an emphasis on business continuity and succession

Aug 9, 2015 @ 12:01 am

By Mark Schoeff Jr.

When investment advisers who are sole proprietors die unexpectedly without a continuity plan in place, the firms where they house client assets react rapidly.

“Custodians are increasingly adept and swift at taking action,” said Brian Hamburger, president of MarketCounsel, a compliance consultant. “[They] are in a position to immediately suspend many of the trappings of their business relationship” with the advisory firm.

Among the steps a custodian could take are shutting down the master account, freezing the debiting of fees and suspending trading.

“It impacts the ability to serve clients,” Mr. Hamburger said. “The staff will find it difficult to interact with the custodian on the client's behalf.”

The changes typically stay in place until employees or the adviser's heirs demonstrate they have the authorization to conduct the adviser's operations.

As soon as Fidelity finds out an adviser on its platform has died, it sends a letter to clients informing them of their options, which include managing their own account with Fidelity, finding another adviser on the Fidelity platform or selecting a Fidelity registered representative.


“It's quite honestly a matter of days,” said David Canter, executive vice president of practice management and consulting at Fidelity Clearing and Custody. “We don't want clients to be vulnerable to any kind of market action or issue they have relating to their assets.”

Time is of the essence at TD Ameritrade Institutional, as well.

“If [advisers] haven't preplanned, there are so many variables that need to be worked out on a quick timeline,” said Bryan Baas, TDAI managing director of institutional risk oversight and controls. “At the end of the day, we're trying to do what's best for the customer.”

The first thing that happens for clients of a deceased adviser on TD Ameritrade's platform is that the client takes control of his or her own portfolio.

“If there's not an adequate succession plan in advance, then customers could be left with a self-managed account for weeks,” Mr. Baas said.


When they start directing their own investments, clients become free agents, and TD Ameritrade will help them find a new adviser.

“It's almost like starting from scratch,” Mr. Baas said.

The Charles Schwab Corp. takes the same approach.

“In a case where a succession plan has not been developed by a solo practitioner before their passing, the adviser accounts would become nonmanaged on the Schwab platform until those investors make a decision on who will manage the accounts and where they will be managed,” Schwab spokeswoman Anita Fox wrote in a statement.

Meanwhile, the stricken firm is dealing with the sudden death of its leader — and a potentially declining customer base.

“A [registered investment adviser] without its principal is perhaps the most rapidly depreciating asset that I've ever seen,” Mr. Hamburger said. “It's highly perishable.”

Even with a succession plan, complications could arise.

For instance, an adviser on Fidelity's platform might turn over a business to another adviser who does not work with Fidelity.

“If they're not on the Fidelity platform, there are issues that could arise with respect to access,” Mr. Canter said.

If an adviser transfers a business to another adviser, that person must have authorization from clients to handle their accounts through the custodian.


“Clients must give the new adviser limited power of attorney as well to use the TD platform,” Mr. Baas said. “It's a commonly overlooked item from the adviser perspective.”

If an adviser bequeaths his or her firm to a spouse, the heir might not be able to run the business.

“We're limited as to what authority they have over the accounts because they're not licensed,” Mr. Baas said.

Custodians are stepping up their game at the same time regulators are putting a greater emphasis on business continuity and succession.

Earlier this year, state regulators approved a model rule requiring advisers to have a succession plan. The Securities and Exchange Commission is working on a succession rule for advisers that it oversees.


With the regulatory focus on succession, advisers are paying closer attention to the details of transition, said Peter McGratty, vice president of strategic partnerships at Pinnacle Advisor Solutions. Among the concerns are privacy surrounding client information and access.

“Now, everybody is starting to ask more practical questions about succession and continuity planning,” Mr. McGratty said. “It's going from a nice-to-have best practice to something they have to have. It's crystallizing interest in getting things done.”


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