Just when you thought there wasn’t one more rule that the SEC could impose on advisory firms, here comes another. However, this one has real merit. Does it really require a new rule? I believe not; to do so, to me, is much too “Big Brother-Big Government.” But does it make good business sense for advisors? Yes.
Consider the endless events that could derail your firm, the most palatable being retirement or old age, the most terrifying being death, disability or incapacity. Last month, SEC Chairwoman Mary Jo White shocked the investment advisor industry and caused firms to consider succession planning for the first time since Hurricane Sandy in 2012. This time the focus was more on succession planning from owner to owner, instead of on business continuity in the event of a natural disaster.
Speaking before The New York Times’ DealBook Opportunities for Tomorrow Conference, White deemed “when an investment advisor is no longer able to serve its clients” a key area of focus for the SEC in 2015. Specifically, she cited the need for succession planning “during an advisor’s dissolution or following the departure of key personnel.”
Although White believes this principle arises from the fiduciary duty advisors owe to their clients, Stark & Stark believes that succession planning is important for investment advisors and their owners for many business reasons. The most important reason for advisors to implement succession plans, other than because White is making it a priority, is because it will allow the firm’s principles to realize value, either for themselves or for their loved ones. This is especially true for smaller investment advisors with a single member or single shareholder, although the issues are equally important for all owners.
Consider the single member investment advisor with no other representatives. In the event he or she passes away, absent his or her spouse being registered as an investment advisor representative, the firm will lose almost all of its value upon the principal’s passing. Of course, the spouse or the estate could fill in as an owner and hire a new, licensed representative to service the firm’s clients. However, from experience, the loss of a key person will often cause clients to flock to new advisors.
To combat this scenario, we regularly assist owners in planning for these unplanned events. We discuss strategies to retain value in the firm and keep our client’s clients on board. In doing so, we coordinate with accountants we have grown to trust to value those businesses and strategically plan for financing sales of the business at future dates and times. A lawyer can draft sophisticated (or relatively simple) buy-sell agreements to help you plan for unexpected life events and appoint a successor to manage your business and service your clients.
Even if the SEC fails to propose rules by October 2015 as planned, we still find it valuable to discuss the issue with advisors to help them craft meaningful succession plans. It is prudent to do so from both a business perspective and as a fiduciary. That way, you can advise your clients that you have made what you believe to be reasonable plans to help them successfully transition their accounts so they can be managed in what you hope will be as seamless a manner as is practical under the circumstances. Of course, there can never be any guarantee of a completely seamless transition or that a client will remain with the firm or transition to a recommended advisor, but having a plan is far more advantageous than having no plan at all.