Be Prepared – They’re Watching You

While most advisors recognize the value of developing and implementing a business continuity and succession plan, fewer than 30% of advisors have a formally documented plan in place and the regulators are starting to take notice.

It’s akin to the plumber’s own pipes leaking — or the shoemaker’s kids going barefoot. Just as sticking buckets under the leaks or telling the kids to wear flip flops isn’t a viable long-term solution, neither is ignoring the inevitable time when you’re ready to step away from your practice to relax and explore other pursuits. Or worse: when you’re forced to do so for some unforeseen reason.

And yet many advisors are in denial about their own retirement and choose not to address succession planning. In the eyes of regulators that constitutes serious negligence of their fiduciary duties.

Who are you? Are you the plumber or the shoemaker – so focused on your clients that you’ve neglected to plan for your own future? If so, that’s a problem – and now it’s also on the regulators’ radar.

How critical, really, is a succession plan?

Currently, more than half of working advisors are close to, at, or even well beyond retirement age. A recent study by Cerulli Associates suggests that the average age of advisors is 54, and many have chosen to wait until imminent retirement before creating their succession plans.

Yet those who do, discover that, just as they warn their clients, waiting until the last minute to plan for retirement results in a suboptimal plan and likely necessitates a delay in their actual retirement: it takes more time than many realize to vet a buyer and transition their practice.

A sizable number of advisors have chosen to work well into their sixth decade and beyond; however, the decreased analytical capacity that often happens as people age can lead to poor decision-making and potential legal risk. Losing that sharp edge can impede their ability to provide appropriate, effective financial advice and guidance to their clients. And that’s raising another red flag for regulators.

Also, what if the unexpected happens — an advisor suddenly passes away or falls ill and can no longer run the business? The value of a financial practice without a business continuity or succession plan in place can very quickly drop to zero. The chaos that ensues after an unforeseen event (from a lack of trading and banking authority, the inability to run payroll, the inability to manage client accounts, and more) could be disastrous.

When the numbers don’t lie

A 2018 study by the Financial Planning Association suggests that 73% of respondents lack any formal succession plan. The numbers aren’t improving, either. About 37% of advisors are projected to retire within the next decade, shrinking the advisor headcount by 1.4% between year-end 2018 and 2023 and putting 39% of industry assets in motion.

Increased accountability for advisors

In 2016, the U.S. Securities and Exchange Commission proposed a rule that mandates business succession and transition plans for all financial advisors the agency oversees. In November 2019, Massachusetts Secretary of the Commonwealth William F. Galvin proposed updates to new regulations designed to:

  • Increase accountability in the financial industry
  • Protect investors by leveraging a strict fiduciary conduct standard on broker-dealers, agents, investment advisors, and investment advisor representatives
  • Protect clients from the negative effects of poor financial advice

While there’s yet no formal rule that requires succession plans, more states — including Massachusetts — are officially instituting regulations that consider succession planning an integral, critical component of an advisor’s fiduciary duties.

The Massachusetts regulation proposed by Galvin includes a list of practices deemed dishonest or unethical, such as providing poor investment recommendations or advice or lacking a plan to provide for clients should the unthinkable happen.

In a concerted effort to protect the best financial interests of investors, regulators will continue to increase their scrutiny of advisors. “My office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice. Investors must come first,” says Galvin.

Should advisors fail to develop and implement business continuity and succession plans, the likelihood of potential compliance and legal challenges that include fines, censure, suspension, or registration revocation will increase. Advisors face the real risk of being written up as “deficient” if they fail to protect their clients by putting in place contingency plans.

When you create a formal roadmap for your future, you’re taking care not only of your practice and clients, but of your own financial future, too — and you’ll stay in compliance with regulations as the states continue to develop, refine, and enforce them.

Stop and think for a moment. What would happen to your clients if you were suddenly incapacitated or unavailable and couldn’t manage to run your business. These are people with whom you’ve probably cultivated long, productive, and trusting relationships. Do you have a plan in place? Is there someone you trust who could assume the responsibility of running your practice in the short term or more permanently?

Work with Trust Advisory Group (TAG)

We get it! It’s hard to walk away from a career you love, but what happens when you’re just not able to keep up with the demands — or your fiduciary responsibilities?

You owe it not only to your clients and their financial interests, but to yourself, your family and your loved ones to protect your financial interests, too.

And as state regulators become increasingly strict, you need to be prepared. You certainly don’t want regulatory hassles in the twilight of your career or have to worry about future litigation from clients in the next economic downturn.

If you’re beginning to realize that you want to slow down and not have to keep pace with the intense grind and pressure week after week of always being at the top of your game, it may be time to step back. Learn more about your options at TAG, from simple succession planning, to a semi-retirement option, or even a full retirement program. TAG wants to work with — and for — you.

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