Whether it’s hurricanes like Dorian that routinely pummel the Southeast and parts of the Atlantic coast or the wildfires that wreaked havoc up and down the West Coast last year, summer has a way of reminding everyone in our industry about the importance of having a disaster recovery plan.
Thankfully, many advisors have taken the time to cover this aspect of contingency planning, putting procedures in place that protect against devastating weather events, a fire or even a terrorist attack.
When it comes to other elements of contingency planning, however, most advisors haven’t been quite as proactive, slow to draw up plans that deal with short- and long-term disability, as well as death. Theories abound for why this is the case. One is that advisors are very protective of the businesses they have built and are uncomfortable imagining anyone else running them. Another is that they don’t want to consider their own mortality.
Whatever the case, there is no good excuse for failing to have a contingency plan. Advisors devote their entire professional lives to helping others plan for the future but then don’t do the same for themselves? It’s nonsensical.
With that in mind, consider the following essential contingency planning questions:
Is my plan valid? Often, advisors think they have a plan that covers them in case of death or disability, but upon closer inspection, they either haven’t filed it with their broker/dealer, or it lacks the required language that makes such agreements valid. While many in our industry came of age at a time when back-of-the-envelope agreements were commonplace, a more formalized approach is the best way to protect your business, your clients, your heirs and your staff.
Check with your firm to see whether they have a template to use to make sure you are using the mandated verbiage. Otherwise, you’ll have to pay a securities attorney to draw up your paperwork, which can be costly. Then, once you have drafted a formalized agreement, take the time to discuss it with the appropriate person at your firm and put it on file. Without taking that step, broker/dealers have a limited ability to compensate would-be contingency plan partners, allow them to service existing clients and ensure your heirs and/or estate are receiving the compensation you intended.
When was the last time my practice was valued? Some firms have tools that not only allow advisors to find out what their practice is worth but also what steps they can take to boost its value. However, most consult these services too infrequently, using them only as they near retirement or on a one-time basis when they want ideas for how to improve growth. But these tools also help with contingency plans.
Contingency plans should include not only the beneficiary information and current contingency partners but also reflect the current valuation of the business. If an advisor doesn’t regularly value their practice, it could end up hurting their estate. By continuously leaning on tools that benchmark and appraise businesses, advisors can better avoid that pitfall.
Can someone realistically support my business in a pinch were something to happen to me? For many advisors, it’s not possible to have a contingency partner who lives and works in the same town. That could be because they are in a remote area or merely because they couldn’t find the right fit for their clients. So, they look outside the city limits.
In these cases, it may not be possible for the contingency partner to assume the sidelined advisor’s responsibilities immediately. This is where firms should step in to fill the void by servicing clients, managing staff and communicating with beneficiaries. But what happens if an advisor has a contingency plan on file with their firm but no partner? A firm should be able to find a suitable match to take over the business, allowing an advisor’s estate to benefit if a long-term disability or death occurs.
Should I have an in-house contingency partner? Critics always say that it’s very self-serving for firms to tout the benefits of having an in-house contingency partner. Nonetheless, the reality is that such an arrangement is no doubt more beneficial to all interested parties because the transition is far simpler. That’s due to a variety of reasons, including:
- Advisors are incapable of servicing out-of-network accounts, even in the short term;
- Clients, familiar with the firm and its process, will face far less disruption, underscored by the fact that they would not have to repaper their accounts;
- Client-facing technology, service center support structures and account statements remain the same;
- Because broker/dealers are limited in how they can compensate outside partners, in-house advisors better protect the practice’s value and, thus, the estate.
The good news about contingency planning is that as clients begin to age, more of them are asking advisors about their plans for the future. That has sparked a greater sense of urgency across the industry.
At the same time, the number of advisors who have comprehensive plans spanning short- and long-term disability, death and even disaster recovery remains frighteningly low. That needs to change now.
Tammy Robbins is vice president of business development at ProEquities (member FINRA/SIPC), a Birmingham, Ala.-based firm.