Are you a fiduciary? Do you have a fully tested and documented continuity plan? If you answered, “yes,” to the former, you need to answer, “yes,” to the latter
Are you a fiduciary? Do you have a fully tested and documented continuity plan? If you answered, “yes,” to the former, you need to answer, “yes,” to the latter.
Continuity planning isn't the same as succession planning. In fact, there isn't a clear definition of either term.
To complicate the issue further, what I call a planning “practice” requires a very different continuity plan from a planning “firm.”
Given the imprecision, let's define a few terms.
A succession plan covers who will take over your job when you retire, including preparing your successor and your business for the transition. Note that this doesn't involve selling your company or your clients, though an acquirer can also be a successor.
A continuity plan, by contrast, covers who will serve your clients if you (or any important member of your team) becomes unable to work. Such a plan must be documented and tested, and the transition should be able to be performed quickly — in a couple of days at most.
It must include a plan and procedures for client communication, data access and IT systems transition, custodial access, trading and re-balancing, monitoring, cash management and paper files access.
Basically, continuity planning is the same as disaster recovery planning, since in most firms, the principal's becoming incapacitated is a bigger disaster — and probably more likely — than hard-drive failure, a fire, earthquake or alien attack.
The terms “firm” and “practice” are harder to define, as every financial advisory business sits somewhere on the continuum between the two extremes and doesn't match either one exactly.
The important thing is to determine the direction your strategic plan points.
To quote a very unscientific number (coming from me and based on no research whatsoever), 90% of financial planning businesses should focus on being practices, not firms.
Building a firm's infrastructure is complicated and expensive, and can provide a very bad return on investment. Practices have a lot of flexibility, no bureaucracy and frequently have more free cash flow.
A great strategy for a practice is to distribute as much cash as possible and when the principals retire, lock the doors and find a good home for clients: No succession plan necessary.
Practices have a big negative, however, and that is their difficulty in creating a continuity plan. Firms by definition have an easy time creating continuity, as typically more advisers are involved and the work can be easily parceled out to existing staff members.
Not so with practices.
A practice's biggest difficulty in creating a continuity plan is finding someone to do the work. Some practices team up with other local practices to help each other out in case of emergency.
This is a mistake, as it seems inconceivable that a financial adviser would be able to double his or her client load overnight without becoming overwhelmed and making mistakes. You must find someone who has enough capacity to absorb your clients.
The same problem exists if you plan to sell your clients to another practice when you retire. If you are to remain true to your fiduciary oath, choosing a new home for your clients must be more than just finding the highest valuation.
Unfortunately, there is no magic solution to this problem, as each firm has unique needs. I wish I could offer a step-by-step plan to create the ideal continuity plan, but I leave it to your ingenuity and creativity to create this last piece of the client's financial plan.
J.D. Bruce is a managing director at Abacus Wealth Partners LLC.
