A contingency plan can be positioned to clients as a value-add and a demonstration of sound estate planning.Andrii Yalanskyi/iStockPhoto / Getty Images
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Although many advisors urge clients to create comprehensive transition plans for their businesses in case of unexpected death, too few have plans of their own in place. And when an advisor dies without a contingency plan, there are negative repercussions for clients, staff, the dealer and the advisor’s family.
“It happens more often than you think, and it’s heartbreaking to see it in real-time,” says Afsar Shah, business and regulatory coach with The Personal Coach in Waterloo, Ont. “The lack of advisor readiness and preparedness with respect to succession and broader transition is arguably the most important strategic challenge facing our industry today.”
He emphasizes that three different plans comprise a comprehensive transition plan for the ownership, leadership and management of an advisory practice. A succession plan lays out the gradual internal transfer to the next generation of advisors. An exit plan sets out the external transfer to a third party. And a contingency plan arranges for an internal or external transfer in the event of unforeseen death or disability.
“We tend to use [the terms] interchangeably, but they’re three different concepts meant to address three different problems: how to grow your business, how to monetize your business and how to preserve its value.”
A contingency plan is key to preparing for an unexpected death. Without it, when advisor registrations terminate on death, the dealer must find another advisor of record for the clients and typically assigns one or more people from within the firm to take on that role either temporarily or permanently. The dealer then generally notifies each client of the advisor’s death and provides the name and contact information of the assigned advisor.
“When the dealer reassigns the deceased advisor’s clients, it’s not as if they’re going through each [set of] client information, one by one, to determine who they think is going to be the ideal new advisor for that client,” Mr. Shah emphasizes. “They’re assessing if there’s another advisor who has the need or the capacity”
In contrast, creating a contingency plan enables the advisor to identify a particular colleague as the contingency partner who will continue to meet with clients, manage staff and run the business following the triggering event.
With a contingency partner selected and an agreement and appropriate insurance in place, the advisor has an opportunity to inform the dealer, staff, clients and family in advance. The advisor also has more control over how the business is valued, with negotiated terms that specify the payment to be made into the advisor’s estate.
“This will help [advisors] maximize, monetize and preserve the value of their business and, at the same time, [just] as important, ensure the well-being of their staff, their family, their clients, their legacy and their reputation,” Mr. Shah says.
But many advisors aren’t focused on succession early enough. “You have to start thinking about these issues now because it’s in your business’s best interest to do that,” he says.
An ethical imperative
Rod Burylo, associate portfolio manager with Equate Asset Management Inc. in Calgary, runs continuing education classes on topics related to ethics and compliance, including one focused on practice succession and business continuity. He says there’s an ethical reason for advisors to plan in case of sudden death: every advisor commits to “do certain things a certain way at a certain price” for clients, and that results in a moral obligation to make sure commitments are fulfilled.
While some clients may be in maintenance mode, with a portfolio on autopilot, others may be on the point of withdrawing money to cover an emergency expense. In that case, the advisor’s death can be very disruptive to the client, Mr. Burylo says.
Even if the client gets a letter in short order giving them the name of the advisor who will be taking over their file, it can take time for the newly assigned advisor to reach out and much longer for that advisor to build a trusting relationship without a warm hand-off.
Dealers also have a moral obligation here, Mr. Burylo argues. Management should impose contingency or business continuity planning on advisors so that when an advisor gets sick or dies, files are up to date.
“If the new advisor gets a file, they can get a snapshot of the client [and fulfil their] ‘know-your-client’ obligation – which they have immediately upon receiving the client.”
Mr. Burylo says that while many dealers encourage advisors to put contingency plans in place, more are starting to recognize the business case for making it a requirement. After all, appropriate planning makes it more likely assets will remain within the firm.
Another prompt for dealers would be a shift in the regulatory environment, which currently requires that they have a business continuity plan but that might, in the future, extend that requirement to individual advisors.
“That’s the extreme,” Mr. Burylo says. “One of the middle ground things I’ve seen, which I quite like, are professional associations [saying], ‘We’re going to do spot checks of your practice’ or ‘We’ll do an annual practice review’ … and ‘We want to see what you’re doing for business continuity.’”
Once an advisor has a contingency plan in place, it can be positioned to clients as a value-add, Mr. Burylo says.
“Turn it into a positive in the relationship,” he recommends, by telling clients, “‘This is what professionals do and this is one of the ways I look after you’ … or, ‘I want to lead by example on this, and not only do I tell everybody else that they should be looking after their estate planning, but I am doing it, too.’”
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