- Most advisors without a plan recognize the potential perils of not having one: Ffity-four percent see a significant risk and 41% see some risk, a 2018 report shows.
- Just 13% of advisors at firms managing less than $50 million in assets have a formal plan, compared with 60% of those at firms managing at least $500 million.
By 2016, certified financial planner Kirk Francis had helped numerous small business owners implement strategies for exiting work. Yet he didn't have a succession plan for his own firm.
"I sat there going, 'Hmmm … the cobbler's son has no shoes,'" said Francis, CEO and chief compliance officer at Financial Life Advisors in San Antonio.
Soon after, by buying another practice and taking on a partner, Francis made a plan that ensures his business will continue and his clients will be taken care of when he is no longer there to do so, whether it's due to some unfortunate event or he's simply retired as planned.
However, Francis is in the minority among his peers, according to various studies. While advisors are more likely to explore their options as they near retirement, 73% overall lack a formal succession plan, according to a 2018 study by the Financial Planning Association and Janus Henderson Investors.
Yet many experts think it's a crucial aspect of running an advisory firm.
"I think our biggest concern is that when a client asks you what would happen if you get hit by a truck or something else bad happens, the response usually isn't an acceptable one," said Anand Sekhar, vice president of practice management and consulting at Fidelity Investments.
"Many investors do care, and you should have a good response to that question," Sekhar said.
There is no federal legal requirement that advisors have a succession plan in place. The Securities and Exchange Commission proposed a rule in 2016 to mandate "business continuity and transition plans" for the 12,000 or so investment advisors it oversees (of the estimated 300,000 financial advisors out there of all regulatory stripes). However, the Obama-era proposal has gone nowhere and there's little expectation for change any time soon.
At the state level, though, advisors could face a requirement. At least 12 states mandate a plan, according to the North American Securities Administrators Association. The group created a model rule several years ago, which states could adopt, to require registered advisors to have business continuity and succession plans in place that minimize "service disruptions and client harm that could result from a sudden significant business disruption."
Information on exactly how often clients are left in the lurch from the sudden departure or death of their financial advisor is hard to come by. Attorney Brian Hamburger, founder of industry consultant MarketCounsel in Englewood, New Jersey, said he gets several calls a year because of an advisor unexpectedly dying. And when it happens, chaos ensues.
"Without a business continuity or succession plan, it's a highly perishable asset," Hamburger said. "Only days after the unavailability or demise of the founder, these firms have no trading authority, no banking authority or authority to run payroll. It's a chaotic situation."
He said he often ends up on the phone to the widow of the advisor, stressing the importance of acting quickly when all the person wants to do is take time to mourn their loss.
"It's awful," Hamburger said.
Most advisors without a succession plan recognize the potential perils of not having one: Fifty-four percent see a significant risk and 41% see some risk, the FPA study shows. Also, 97% of them say they will create a plan at some point.
Across the board, the most-often cited challenge involves finding the right partner or successor.
"When we dig deeper, though, we find that the reason is rooted in classic human behavior — 'I've got time' or 'I can do this later,'" said Michael Futterman, head of Knowledge Labs professional development at Janus Henderson.
CFP Bruce Vaughn, 62, the founder of VLP Financial Advisors in Vienna, Virginia, now has three partners as part of his firm's succession plan. Two of them began buying shares 10 years ago.
"A plan is important on a lot of levels," said Vaughn, who has no retirement date planned yet. "From a fiduciary aspect, it's important to have that nailed down.
"If I got hit by the proverbial bus, where does that leave my clients?" he added. "And where does that leave my staff? Do they still have jobs?"
He also said his plan matters for retention reasons.
"I want my most valuable staff to have the opportunity to do well here and get rewarded for the work we're all doing," Vaughn said. "If I don't provide that opportunity, they'll go somewhere else."
CFP Daniel Lash, one of Vaughn's partners who began buying shares from him 10 years ago, said clients have started asking more often what Vaughn's retirement plans are.
"We communicate that all of his clients will be taken care of," Lash said.
Not all financial advisors who do succession planning go the internal succession route, which requires both employees who have the skills to lead the firm and the financial wherewithal to buy in. It also often involves a discounted price compared with what an external sale might bring.
For smaller operations, the lack of a succession plan is more acute: Just 13% of advisors at firms managing less than $50 million have a formal plan, compared with 60% of those at firms with $500 million or more in managed assets.
At a minimum, advisors should have a contingency plan to cover client services if they are unable to, along with a buy-sell agreement, Fidelity's Sekhar said.
With a basic buy-sell agreement, if one of the parties dies, the other buys those shares. Life insurance policies often ensure funds are available to make the purchase, and any valuation should be revisited from time to time.
Financial Life Advisors' Francis said a financial planner who operates solo and is about 40 years old is considering using his firm as part of a succession plan.
"But too many egos out there are saying, 'I can do this on my own,' and that doesn't let them see they might not be around tomorrow because of a car wreck," Francis said.
He also notes that his own plan involved some compromises. For example, he gave up 11% in commission revenue because the merged firm is fee-only. Making that shift, he said, was scary — although the merged firm ended up with 20% growth in 2017 and 2018.
"It's a lot more fun," Frances said of work now that he has a partner and a plan. "Having someone who has as much skin in the game as you do, and cares as much as you do — it just feels better."