Don’t get blindsided by a catastrophe

As a financial adviser, you assist clients in planning for their future. But have you planned for the…

As a financial adviser, you assist clients in planning for their future. But have you planned for the future of your own practice? What happens to your business if tomorrow you are permanently disabled or die? Where do your accounts go? Will your spouse or other beneficiaries receive economic benefit from your practice? Lots of questions need answers before it is too late.

QUESTIONS TO CONSIDER

Q: Why do I need a succession plan if I don’t intend to retire from the business anytime soon?

A: To protect your business, clients and family, you need a written business continuity agreement that addresses death or disability, permanent or otherwise.

Q: What happens if a branch owner dies or becomes disabled without a written succession plan on file?

A: Without a valid written succession plan, the broker-dealer may take over the branch owner’s accounts or block other financial advisers from soliciting those clients for a set period of time (for example, 60 days), and the branch may be closed.

In some cases, depending on the business agreement the branch owner has with the firm, the owner’s beneficiary may receive only any earned but unpaid revenues, less outstanding expenses.

Q: What happens if a financial adviser in a branch dies or becomes disabled without a written succession plan on file?

A: Depending on the broker-dealer, if the financial adviser does not have a valid written succession plan, the deceased or disabled adviser’s licensure is terminated and his or her client accounts could be transferred to the branch owner or the broker-dealer, if the owner requests.

In some cases, branch owners may, at their discretion, make a one-time payment or execute a fixed note with payment to the adviser’s beneficiaries. But they may be under no obligation to make such a payment, and it cannot be tied or related to commissions or fees earned.

The reason it is left to the owner’s discretion is that there is no contractual obligation to make any payment, and there cannot be sharing of revenue pursuant to Rule 2040 of the Financial Industry Regulatory Authority Inc.

Q: Can I designate an assistant or branch professional as my successor?

A: Some branch owners name a licensed assistant or branch professional as their catastrophic successor. While this may seem preferable to no plan at all, it is better to search for a producing financial adviser to minimize client attrition in coordination with retaining the branch professional.

Any licensed branch professional must meet the experience and qualification standards the broker-dealer applies for approving individuals for the role of branch owner and manager. Being named a successor does not automatically qualify someone to become branch owner.

Q: Can my successor be with another broker-dealer?

A: Depending on the broker-dealer, it can limit transfer of accounts to a financial adviser within the firm.

Clients would need to complete paperwork with the successor to move to another broker-dealer; logistically this would be nearly impossible unless clients were made aware in advance and then chose to work with that financial adviser.

In addition, client privacy laws —specifically Securities and Exchange Commission Regulation S-P — prohibit the unauthorized disclosure of personally identifiable information to anyone external to the broker-dealer of record. There are also state-specific privacy laws that must be observed.

Because of these requirements, client retention typically suffers. That, in turn, may lower a successor’s payments to a beneficiary based on future revenues (which have to be facilitated from broker-dealer to broker-dealer). Therefore, a successor external to your current broker-dealer would not be a feasible decision.

The following three moves will begin to ensure that your clients will receive the proper service, that your family will be compensated for your years of hard work and that your staff will be taken care of if something catastrophic happens.

STEPS TO FOLLOW

1. Identify a potential candidate to help service your accounts. The person should be a currently licensed financial adviser at your broker-dealer. If you do not know where to start, contact your broker-dealer for several references.

2. Meet with the candidates. Discuss your investment style and client base, as well as your business philosophy and methodology.

3. Complete a business continuity agreement. If you and the candidate are a good match, this document should include specific payment terms and meet the criteria of a bona fide contract.

Your broker-dealer should have form samples.

Patrick Jinks is vice president of succession planning and acquisitions at Raymond James Financial Services Inc.