Investors: Does your advisor have a succession plan?

A financial advisory firm with no succession plan should simply wave good-bye to its clients, say financial experts.

Succession planning isn't just about advisors realizing value for the businesses they've built. It's about protecting and ensuring that clients' needs are met and that the practice can remain an ongoing business after its founder has retired or passed away.

Succession planning
Steve Debenport | Getty Images

That's what many financial advisors have told me over the years, and that's why I was a bit shocked when a financial advisor challenged the very idea of succession planning to the media panel I served on last week at the MarketCounsel Summit in Las Vegas. This advisor asked the panel—Fred Gabriel of InvestmentNews, Rachel Elson of Financial Planning, Kevin Noblet of The Wall Street Journal and me—why he needed to create a plan and whether we actually believed he owed this to his clients.

"I have no family to leave my business to, so why should I go to the expense and hassle to create a succession plan?" he asked.

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His statements had me and others on the panel scratching our heads. My response to this advisor was that he had a fiduciary responsibility to his clients to detail a comprehensive succession plan. I also challenged him, saying that if he had no plan in place, he was putting himself at a competitive disadvantage because he didn't seem to care about protecting his client's interests.

To that point, this should be a red flag for all investors who either have a financial advisor or are looking to hire one in the future. The savvy financial advisory firms understand how important a succession plan is for their firm and their clients.

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Certified financial planner Ron Carson, the founder and CEO of Carson Wealth Management Group, can attest to the value of a succession plan that motivates employees and provides clients with peace of mind. He expects that most solo practitioners don't have the energy and wherewithal to undertake the effort and that larger firms like his own will have a competitive edge in a coming shakeout in the industry.

"It's natural that investors want to know how they're going to be impacted if the founder of the firm dies or retires," Carson said. "A succession plan provides a huge marketing advantage."

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A great many industry surveys have concluded that less than a third of all financial advisors have a written succession plan in place. That raises an important question: Why do so few financial advisors, who spend a lifetime counseling clients about the importance of planning ahead, not have a solid plan in place for their own retirement and for the succession of their own business?

A recent white paper from SEI Advisor Network revealed that while nearly 32 percent of advisors claim to have a succession plan, only 17 percent have a binding and actionable agreement. This data points to the need for advisors to reassess their succession-planning goals and strategies.

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"Advisors are beginning to realize that succession plans and continuity plans can actually become growth tools," said John Anderson, head of SEI Practice Management Solutions, SEI Advisor Network. "By taking the time to plan for the future, advisors are giving themselves a key competitive advantage in the present.

"The process gives them a clearer picture of their firms' overall health, prioritizes finding a new generation of talent and sends the message to clients that the firm will be viable for years to come."

Without a succession plan, advisory firms risk seeing their small businesses dissolve when they retire. Additionally, a good succession plan is a necessity for keeping existing clients and attracting new ones, experts say.

Carson stresses that investors should ask themselves this important question: Do you believe that if you went to sleep tonight and didn't wake up, the advisory firm you have a relationship with today should be entrusted with the ongoing management of your family's wealth?

He challenges investors to ask this question, as well: If your advisor went to sleep tonight and didn't wake up, would you continue to entrust the firm he/she left behind with the ongoing management of your family's wealth?

"An insufficient or nonexistent succession plan is a disservice to you, and your advisor has a fiduciary responsibility to create a succession plan that's comprehensive, efficient and transparent." -Ron Carson, founder and CEO of Carson Wealth Management Group

If your answer is "no," "maybe" or "we would have to see," it's time to ask your advisor more questions to fully understand what happens to you if something happens to him or her.

"If you haven't inquired with your advisor about his or her succession plan, it may be a worthwhile question to ask," Carson said. "An insufficient or nonexistent succession plan is a disservice to you, and your advisor has a fiduciary responsibility to create a succession plan that's comprehensive, efficient and transparent."

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Advisors need to live by the practices they preach, said some financial experts I spoke with at the summit. Clients want to work with a trusted financial advisor who is doing the right things for their own legacy, many of these advisors stressed.

"Our clients have been very interested in our succession plans and how effective those plans might be should something happen to me, the old guy," said Martin Kurtz, a certified financial planner and president of The Planning Center.