If you went to sleep tonight and didn’t wake up, would you entrust your family’s money to your wealth management firm? Does your firm have a succession plan that would kick in for this type of crisis that would leave your heirs (and your clients) safe and secure?
Sadly, I think few principals can honestly answer that question with a yes. Sure, most owners believe that their staff could muddle through in an emergency, or they have talked informally with a firm in the area about taking over in a crisis situation. But that’s not a real plan—the rock-solid plan that a client would expect from a fiduciary advisor.
I think that every financial planning and wealth management firm needs a genuine succession plan. A plan that’s as vetted and viable as our business disruption plans for floods, power outages and computer malfunctions. A plan that will give our clients confidence that they will have access to their money (yes, it’s their money) and all of their financial information, even if we are incapacitated or die.
The fact is that none of us will be running our businesses forever. At some point we will have to turn over the reins. We hope it will be an orderly transition to family members, current employees or another firm or a consolidator. But what if a sudden health problem renders us unable to lead our firm before that plan is in place?
Naturally, our clients are concerned about this issue, too. At some point, they have asked us if our firm is prepared for the unexpected. We assured them that we have a backup plan for fires, floods, etc. We also promised them that we have a plan if we personally have a problem, too.
We have a fiduciary responsibility to our clients to do this right. The plan has to be comprehensive, efficient and transparent. We can’t spend months disrupting our clients’ lives as we work out the transfer of client information, and we have to maintain confidentiality of client data at all times. Realistically, a transfer to new ownership probably can’t happen in less than 60 days, even under ideal conditions.
I read a study by Moss Adams that 20% of financial planning firms say they have a plan in case the principal is incapacitated. As low as that figure is, I think it’s wildly inflated. My guess is that maybe 5% or 10% of firms are really prepared. Most firms that claim to have a plan merely have a back-of-the-napkin deal.
Why do I doubt the established numbers? In addition to owning a wealth management firm, I am the founder of Peak Advisor Alliance, one of the nation’s largest advisor coaching and practice management consultants. We have relationships with firms that represent more than 1,000 financial planning offices nationwide. I’ve seen inside these firms, and I know whether they really have well-defined, quickly actionable succession plans. They don’t.
There’s more to this story. Not only is a bad or nonexistent succession plan bad for clients, but it represents a huge opportunity cost for the owners of every planning firm. Are you going to maximize the value of your firm by having it shut down by a crisis, with your clients dispersed to whoever has an office nearby? Or are you going to maximize its value by having a thought-out, written contract with appropriate and prepared buyers? Let’s not forget that taking time to structure the deal correctly will minimize the tax impact on your heirs, too.
Now, I’m going to make an unusual statement for someone in our industry. I think we need more regulation. Specifically, we need a strong, legal requirement that every firm have a viable emergency succession plan.