Come On, Advisers, Look at Your Own Future

Very few advisers have a succession plan, and it’s possible that regulation is needed to protect their clients and investors, a report says.

If you knew you weren’t going to wake up tomorrow, a report asks, how confident would you feel about the future of your firm? Ron Carson, founder and CEO of Carson Wealth Management Group, asks this question in “The Cobbler’s Children Have No Shoes: Don’t Put Off Planning Your Succession.” Just 7% of wealth management firms have an actionable succession plan in place, should the firm’s principal become incapacitated, the report finds.

The report, a case study on the succession planning crisis facing the advisory community, was released by the Alliance for Registered Investment Advisors (aRIA), a research study group that comprises six RIA firms.

It is an uncomfortable topic for many advisers, Carson tells PLANADVISER. Many advisers even have claimed to have a succession plan when they do not. “They want to do the right thing but don’t think about the ramifications for their clients when they don’t,” he says. Without a succession plan in place, the adviser’s untimely death can cause a lot of disruption.

The adviser without a succession plan is taking on a systemic business risk, says John Furey, principal of Advisor Growth Strategies LLC and a managing member of aRIA. “Any adviser looking at it rationally would have to agree,” Furey tells PLANADVISER. Leaving a firm can feel very distant. “The trouble is not in front of them today,” Furey says.

A Plan for Planners

Those advisers who claim to have a plan often have, instead, a vague verbal agreement about what the adviser would like to happen, Carson says. The report points out the irony in advisers putting so much effort into ensuring the continuity of client services in case of a disaster, when they themselves fail to exercise the same diligence when it comes to the inevitability of separating themselves from their own firms.

The need to hold to a fiduciary standard can break through reluctance, Carson says. Advisers are brought up short when they realize they could be putting their clients at risk.

What happens to the clients is not talked about enough, Furey says. Consumers and investors are put at risk if they are left stranded with no continuity or planning after a 20-year relationship.

The paper outlines key issues for implementing an effective succession plan, including a detailed 15-point checklist for advisers to complete to get started. Carson believes that regulatory bodies need to compel advisers to have detailed, actionable succession plans in place.

“I think we’ll be having the same conversation 20 years from now unless it is regulated,” Carson says. FINRA requires brokers to have a business continuity plan (BCP), but there is a greater chance of someone dying than an office being wiped out by a tornado. The Securities and Exchange Commission (SEC) could require a succession plan be disclosed on the ADV form, he suggests.

Regulation could be on the horizon. Furey says that an industry representative asked him if he would appear on Capitol Hill at a hearing to discuss the need to require such planning.

Case Studies

The report includes case studies that demonstrate how Carson’s firm helped two different advisers who needed a succession plan. Scott Ford, a $300M AUM adviser from Maryland, and Nancy K. Caton, a San Francisco-based adviser with $250M AUM, both created succession plans.

If you are squeamish, you might want to proceed with caution, as there’s strong language ahead. It is impossible for advisers who hold themselves up as fiduciaries to fulfill this if, upon their death or disability their business falls apart, the report says. In that case, the clients who placed their trust in the firm are left to pick up the pieces.

“I ask advisers to look in the mirror and ask themselves just one simple question: ‘If you went to sleep tonight and didn’t wake up, would you entrust your firm with the ongoing management of your family’s wealth?’“ Carson says. “If the answer isn’t an immediate and resounding yes, then you have important work to do.”

One critical reason that demonstrates the importance of a succession plan is that the valuation of a business with a detailed succession plan in place is significantly higher, according to the study.

“If it convinces one person it will be worth it, but hopefully it will convince more,” Carson says.

The case study is available free of charge on the aRIA website.