Financial advisers who don't operate as at least a partnership need to have a continuity plan in place, or their clients' finances could be temporarily frozen and their heirs iced out of the business altogether if the adviser dies.
If a solo practitioner passes away or is incapacitated and there has been no arrangement for another adviser to be able to make trades for those clients, the adviser's broker-dealer can distribute those clients to any of their advisers without consideration of matching to client particulars, said Kevin Cullen, director of practice management for Loring Ward, a
portfolio management firm.
There's no guarantee of compensation to heirs if they lose out on opportunities, he said.
Mr. Cullen recommends that advisers, even before considering a long-range succession plan, identify someone to take over the business in an emergency. Advisers also should communicate their contingency plan to clients. It can even be a great opportunity to assuage client fears, Mr. Cullen said.
“Advisers can go directly to clients and address the white elephant in the room,” he said.
Larry Frank Sr. of Better Financial Education created a guardian plan with another adviser after thinking about it for about two years. Last year, he sent his clients a letter describing the agreement and forwarded them forms to sign so that if anything happened to him, the other adviser could provide clients services — temporarily or permanently.
Privacy laws demand such pre-authorization for immediate services, he said.
Mr. Frank made it clear that he didn't expect anything to happen to him any time soon and that nothing was changing unless it did. The letter also made clear that this wasn't about retirement or any business issues.
“This has nothing to do with markets or the economy,” Mr. Frank wrote. “This is simply a prudent plan to provide uninterrupted service to you that you have come to expect from me.”
He said his clients appreciated knowing that something firm was in place. He even included the contingent adviser in an event with clients this year so that he will be more familiar with them.
Cambridge Investment Research Inc. implemented a firm-wide program to help all of its advisers put in place a personalized continuity plan after one of its young advisers died suddenly in a wakeboarding accident without having any such plans.
It took immense work to help a family member who was in the insurance business become licensed and able to gradually take over that business, said Eric Schwartz, chief executive at Cambridge. It was not ideal or easy, he said.
Another adviser in his late 30s died suddenly a few years ago without a continuity plan and his family ended up getting about a quarter of the business' value, Mr. Schwartz said. He also lacked life insurance.
“Even planners don’t plan,” Mr. Schwartz said.
For advisers who participate in Cambridge’s Continuity Express program, the broker-dealer will step in, “cut checks” and help take care of heirs and clients, he said.
Like Loring Ward, Cambridge also recommends advisers proactively tell clients when they have a continuity plan set up.
“You know clients are always wondering about it,” he said.
