hands passing the baton, business and sports, business succession

With the average age of the population increasing, there are also more senior advisors than ever before. Those in the financial services industry need to consider their succession plan. While the focus of this article is on senior advisors, it actually applies to any advisor, as you never know when a tragedy may hit and you’ll need a ready-to-go plan to execute.*

Like most people, advisors don’t like to think about the day they won’t be able to work anymore and don’t want to plan for it. There are a few things about advisors that make it even harder for them to develop a plan:

  1. Most advisors are entrepreneurs, so they are motivated to grow their business. Their work and success defines them.
  2. There isn’t a ready market for the sale of their business, and the value depends on whether clients transfer to the buyer or consider other options.
  3. Similar and related to the item above, the value of an advisor’s business is based on their personal relationships and their reputation, which is difficult to quantify and makes it hard to transfer to a buyer.
  4. It can be expensive to get the right advice from the professionals needed to sell your business, like lawyers and accountants, that doesn’t eat all the proceeds of a sale.

This is why many advisors don’t plan for the day they are unable to work. Instead, they ignore the issue of what will happen if they get sick or pass away unexpectedly.

If there is no plan, their business transfers to a random advisor at the dealer or to the dealer’s house account, and little or no value of the business goes to the advisor’s estate. What that also means is the spouse (or common law partner) and other dependents are suddenly cut off from any income previously relied upon and have no proceeds from the sale of the business.

Even if the business is sold after the sudden illness or demise of the advisor, when an advisor suddenly departs, the business is worth far less because there isn’t a smooth transition period that allows the departing advisor to introduce clients to the buyer. Instead, there is an abrupt and upsetting letter that is delivered to clients announcing the sudden unavailability of their advisor and naming the person who will assume responsibility for their accounts. This often results in clients not remaining with that new advisor. Further, negotiating the value of the business by the remaining spouse or other dependent is fraught with challenges, including suggestions that the business was neglected and needs upfront work to get client accounts on side.

A bigger problem is that there can be client complaints and regulatory investigations (as well as internal dealer investigations) when the advisor is sick and unable to instruct counsel or provide evidence for his or her defence, or attend a regulatory interview or examination for discovery.

You might think, what are the chances there would be client complaints or litigation? You should know that I have been retained in these circumstances by the advisors’ spouses to defend them, which is challenging as we don’t have the advisors’ necessary evidence. Further, some advisors have neglected their health over a period of time and have been unable to properly service their clients. In those circumstances, the book of business can attract many complaints, especially when the clients meet with a new advisor and are told their accounts have been neglected. If you think this doesn’t happen when the accounts remain at the same dealer as the one you were working for, think again.

All this to say, planning for the succession of your business is only fair to your dependents. It is better to have a plan that yields something, even if it’s less than what you think is reflective of the true value of you business, than no plan, which can lead to substantial defence costs for the estate.

How should you approach succession planning?

First, plan for this well in advance of any signs of medical challenges. This is like the advice you give your own clients to choose a power of attorney and have their wills in order well before they have dementia. Once you become sick, you might not have the physical or mental capacity to make these decisions.

Second, identify who would be the best successor for your business well in advance so that if any health issues arise, you are ready. It might take a few tries to get this right. For example, you might think one person is a good choice, but as you get to know them, you change your mind. Or, as you introduce the person to your clients, you see it isn’t a good match.

Third, if you are not prepared to stop working or even slow down, see a qualified lawyer who understands the regulatory and legal issues concerning the financial services industry — not a generalist — to find out what can be put in place in case you suddenly need to stop. Explore your options and land on one.

Finally, speak openly with your spouse and/or dependents about your plan. Make sure she or he knows where your power of attorney, will and any business transition plans and documents are kept, and how you intend to protect her or him from being left in the lurch with bills to pay and no immediate source of income. If your dependent is not the one you chose as your attorney (for your power of attorney) or executor (for your will), tell your dependent(s) who you chose and why, and share the succession plan details with your attorney and executor too.

Planning for clients is what advisors do best — be sure to plan for yourself and your dependents too.

* For the purpose of his article, my reference to “advisors” includes portfolio managers and insurance agents.