Years ago, I heard Mark Tibergien say in one of his presentations that owner-advisors who don't have an emergency succession plan in place are acting irresponsibly and possibly violating their fiduciary duty to their clients. I couldn't agree more. The most common question we get from non-client advisors about succession is how to structure for an unplanned transition without a designated successor. In my view, if you have to ask, you are already behind.
Thankfully, we’ve only had to deal with a handful of situations where an owner-advisor unexpectedly passed away or became incapacitated, but there were enough for us to realize that there's very little information on the subject out there for advisors—and most of what is available doesn't appear to be based on real-world experiences. We attempt to have all our advisor clients create a formal sudden-succession contingency plan, one that goes way beyond what advisors typically include in their compliance policies.
The most important thing I’ve learned is that you just can't predict how people will react when the owner-advisor suddenly isn't running the firm anymore: not the staff, not the owner's family, not the clients. Consequently, it's just as important for firm owners to continue to lead after their death or disability as it is when they are at the helm.
To do that, owners need to create a clear and detailed plan of action written in third-grade English: In the event people are using it, they won't be thinking clearly. In fact, the firm owners who are writing the plan at their leisure and in the comfort of their office are the only ones who will be thinking clearly about these issues, so they need to do the thinking for everyone involved. The plan should spell out exactly what each key person needs to do, when they should do it and how they should act while they are doing it. The format should be a simple checklist, which is direct and easy to follow. While every plan will be different, here are some guidelines we encourage our owner-advisors to think about when writing their plans.
Even designated successors will be affected big time. Most owner-advisors seem to believe that their successors are waiting around to take over their business when they are gone and that they’ll be happy to get their hands on the business. Most owners don't realize that the successor will be going through his or her own grief process while trying to keep the business intact. I’ve never seen a successor make rational decisions in the first few months after losing the owner-advisor.
Successors tend to fall into two camps. They either freeze and make no decisions at all or try to over-control the business. They feel pressure to “do something now” and start making a lot of decisions very fast—and very badly.
Recommend grief counseling. The vast majority of successors don't realize they have to do this. They will be going through a lot of pain and won't have a lot to give. Encourage them to learn something about the grief process. Understanding the various stages will help them realize that what they are feeling is normal, so they won't feel out of control. Also, remind them that they need to be very strong to continue to give to the clients.
Through their work, many people will find peace, but only for a period of time: Sooner or later, they will get burned out. Remind them that when the dust settles, they’ll have to take some time to work with their own grief.
Designate an outside successor. If owner-advisors don't believe they have a fully qualified successor on staff, then out of responsibility to their clients, they should find a willing successor outside the firm. This is a decision solely for the owner. While junior advisors should be informed of the decision—they don't need disappointments during difficult times—it shouldn't be a topic for discussion. Simply tell them you don't think they are ready to run the firm yet, but when they are you’ll change the plan. We currently have two firms with successors who are 95% ready. They know if something happens to the owners, their firm will be sold, and I’ll negotiate a partnership for them in the new firm.
Limit outside advice. One of the first instincts of successors who are suddenly in charge is to reach out for advice to colleagues, friends, their study group, other advisors, anyone. They are falling and grasping onto nuggets. While understandable, this is the last thing they should do. During a crisis, one's ability to weed out useful advice from not-so-useful goes out the window. When they get a lot of conflicting advice, it just makes them more confused, stressed and scared.
If they feel they have to, tell them to look for someone who's impartial and trained to work with people in their situation: an industrial psychologist or, even better, an attorney—but not the firm's attorney. Attorneys are used to dealing with clients in distressed situations and identifying the worst-case scenario. It's worth the cost, even if they have to go into debt. When you’re in a stressful situation, the best investment you can make is in yourself: not staff, not the business.
Keep the clients. Most successors will probably know this is their primary job, but a reminder can't hurt. Sometimes you also have to remind them that they won't have any control over the clients, who might need to be resold on the firm. They will have a lot of questions and some won't be too rational. Will their accounts be frozen? Can they get their money? Are their portfolios still being managed? Will there be new investment management? Who has discretion over their accounts?
The best thing to do is prepare a script of what to tell the clients and instruct your successor to use it in all client communications. The script should explain that there are contingency and continuity plans in place. Clients will still get the same great service, it just may be from someone else. If they’re considering leaving, they should be encouraged to talk about it. Transparency is the key. Successors have a tendency to overcompensate for their uncertainty by saying nothing will change. Clients see through this. Advise successors to talk about what a difficult time it is: that they are sad, it's sad for the staff, for the spouse. Once they say that, they put the clients in a place to help them—and give them a bit more leeway.
Consider continuity. The goal of the successor should be to make as few changes to the clients’ experience as possible, at least in the first year. Often the owner-advisor was the investment expert, and a successor sometimes changes the investment process and philosophy by hiring a third-party manager or other experts. This is the worst thing they can do. Clients will be sensitive to any changes: for example, if the new folks aren't as available or their performance is weak. One of the best things an owner-advisor can do for her or his successor is to plan a seamless transition of the management of client portfolios.
Don't forget your spouse. This situation is going to be a bigger shock and burden to your spouse than your successor. He or she will not only be dealing with tremendous grief, but with the disposition of your business as well. Your goal should be to have all the key decisions already made so your successor knows how to respond: who will take over the business, how the transition will happen, how he or she will be bought out and at what price, which advisors (lawyer, accountant, etc.) will help with the transition of the business. It's not only important that you explain your plan ahead of time in writing, but that your spouse buys into it. Nothing will make the transition of your firm unravel faster than a disgruntled spouse.
It's an owner-advisor's responsibility to ensure the continuity of high-quality care for clients in the event of his or her untimely demise, but firm owners also have a responsibility to their successors, their staff and their spouse. Taking the time and effort to write detailed instructions in advance can make all their lives easier during a very difficult time and give them the best chance to continue the great client service that you’ve worked hard to deliver.
I’ve unfortunately dealt with three fire sales due to death of the owner. It's not fun trying to bring together an army that has no plan of attack while being fired at. Do your clients, staff and family a favor and be their leader after your death or disability by making the plan now. It's your responsibility. It's your legacy.