3 Compliance Considerations for Financial Advisors When Drafting a Continuity and Succession Plan
3 Compliance Considerations for Financial Advisors When Drafting a Continuity and Succession Plan
We work in a highly regulated industry with FINRA, the SEC, and state regulators, all putting rules and regulations in place to protect investors. One of the biggest risks that affects investors is what happens if their financial advisor is not available, or unable to continue to provide planning, advice, and service to their accounts. As the financial advisor populations continues to age, continuity and succession planning becomes not only an issue for advisors’ businesses, but also for the clients they currently serve. Some regulators have tried to address the issue, NASAA with a model rule on Continuity and Succession planning, however the reality is it will be up to the advisors who run these businesses to ensure they have properly planned for both their retirement and for the event of an unforeseen death, disability, or other business disruption. The irony is that if you ask many advisors why they haven’t put a continuity and/ or succession plan in place, many are unsure of where to start and often don’t take any action because they are unsure what they can and can’t do within firm or regulatory compliance rules.
However, the risk of waiting far outweighs the risk of putting a written plan in place that protects your business and your clients. To help understand a some of the compliance regulations, here are a few areas that you will want to think about as you are working with your attorney to draft your agreement.
1) Client Privacy: Protecting your client information is one of the most important responsibilities of a financial advisor, however transferring this information to the new firm/advisor to help them serve the clients is equally as important should a plan need to be implemented. The first consideration when determining the best way to make this transfer compliantly is to understand the privacy agreement that your firm currently operates under. If you are part of the same firm, or in many cases broker-dealer, and operating under the same privacy agreement, client information can be transitioned from one advisor to another. If the advisors are with different firms, under different privacy agreements, the clients must authorize the new firm/advisor to have access to their information. A best practice in this scenario is to draft a letter that each of your clients’ sign, letting them know you have an agreement with another firm, what would happen if the agreement needed to be implemented, and have them sign off and acknowledge. It is important to note that just because the client has agreed to provide their information to the new advisor/firm, it does not necessarily mean the client agreements will transfer to the new firm. That will depend on how the client agreements are written and if your state allows agreements to be transferred, and if they do, what type of client consent is needed.
2) Partner relationships: Along the lines of protecting your client data, it is important to understand how your key partners that store your client and business information will handle the transfer of your information. When establishing a continuity and succession agreement, it is important to reach out to your key partners, to understand their processes, and ensure that you have the proper documentation in place with them, should you need to implement. This list would include, but not be limited to your CRM, Financial Planning software, BD/RIA, custodian, and Asset Managers.
3) Compensation: When determining the payout of a continuity and succession plan, there are numerous ways to structure the payments, however there are regulations around to whom payments can be made. There are generally three different ways to fund the agreement: % of revenue, fixed payments, and insurance. The most common way is combining fixed payments along with a % of revenue based on certain contingencies. Now we all know at this point you must be registered(licensed) to receive any compensation or fees, directly or indirectly. However, FINRA and the SEC do allow payments to be made to a retiring, disabled, or payments to a designated beneficiary, if a bonafide contract is in place. So, a key takeaway is in order to pay a % of revenue, you need a legal agreement in place.
Client privacy, how your key partners will handle a transition, and how compensation would be paid are three of the primary compliance considerations when thinking about drafting your continuity and succession plan. For a complete list of business considerations when completing a continuity plan you can download our white paper, these include Finding the Right Successor, Transition Process, Compensation, Documenting the Agreement, Notifying Clients and Partners.
We started this article by saying the risk of waiting far outweighs the risk of putting a plan in place and having to update it later. If you aren’t ready to implement a full succession plan, start with a continuity plan that will ensure your clients continue to receive service in the event of your death or disability. Work with your attorney to draft an agreement to ensure it has the required legal language, and consider how your clients’ information, account information, and compensation would be paid if the agreement needed to be implemented. The final step, and one that often gets overlooked, is to proactively communicate your plan to your clients once the agreement is in place. This will not only allow them to be prepared if a transition is needed, but it will help put their minds at ease that you have planned for their future beyond you. If your clients haven’t asked you about it, they are thinking it, so be proactive and take the necessary steps. If you need help or are unsure of where to start, reach out to our team and set up a complimentary consultative call on how to get your agreement started.