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June 10, 2001 at 08:00 PM
Advisors: Who Owns Your Business When You Die Or Retire?
Business succession planning forces financial professionals to consider ways to sell their rights to their lucrative trail and advisory fee commissions to broker/dealers or even to bequeath those rights to spouses and children.
Many of these professionals have moved into the asset preservation business, so they have built up a respectable flow of recurring residual revenue. Now, as they contemplate retirement, they want to pass this on. But in order to do so, they must deal with several unpleasant facts. These include:
The professionals own death (something no one can time, unless its Dr. Kervorkian);
The professionals own disability; and
The fact that a practice that produces a good income may not always have a substantial long-term value.
A further complication is the regulatory environment and the third parties involved: custodians, insurance companies, and broker/dealers.
At stake is control of billions of dollars in annual payouts–some $6.8 billion in mutual fund 12(b) 1 fees alone last year, according to Lipper Inc. So, professionals do need to address the issues.
To start the process, here are some questions and answers on key factors:
1) What happens to my securities clients upon my death, disability or retirement?
Most broker/dealers will assign your clients to regional directors for handling on a case-by-case basis. Most broker/dealers have a direct obligation to take care of the client upon death of a rep, to safeguard the clients mutual funds and securities.
The National Association of Securities Dealers, through Rule IM-2420-2 (Continuing Commissions Policy), offers an exception to paying 12(b) 1, advisory fees or other transaction-based compensation to a non-registered entity. Because of this, commissions can be paid to an advisors widow or beneficiary, as long as a bona fide contract exists while the rep was registered.
In particular, the Rule recognizes the validity of contracts that vest in the registered rep and his heirs right to receive continuing compensation upon retirement. The rep can designate such payments to the surviving spouse or other beneficiaries.
Retired financial advisors who are no longer registered (or their unregistered widows or other beneficiaries) can continue to receive what are meant to be “service fees,” under the NASD rule, so long as the advisor specifies the details in a contract while still registered and active. But in no event can a non-registered rep receive compensation on new sales activity.
