Creating a Business Continuity Plan for Financial Advisors

What will happen to your practice if something happens to you? It’s a question far too many independent financial advisor-owners avoid, and it’s a problem. Not having a plan in place in the event of your sudden death or incapacitation could put your business, your clients, your team and your family at risk.

A business continuity plan for financial advisors is an insurance policy for your business. It should be a no-brainer. Yet, according to FP Transitions, only 10% of advisors have a written continuity plan even though 90% of clients want their financial advisors to have one.

It’s a similar situation when it comes to succession plans. According to the Investment Planning Counsel, only 11% of financial advisors have a formal succession plan even though more than two-thirds of advisors are preparing to retire.

Advisors’ struggle in business continuity planning is similar to clients who don’t create an estate plan because they don’t want to think about their own mortality. Ignoring it doesn’t change the future.

Another reason many financial advisors don’t have a business continuity plan? It’s not a requirement. In 2016, the Securities and Exchange Commission proposed a rule to mandate that registered investment advisors (RIAs) create written business continuity and transition plans. Unfortunately, that rule has never been formalized. Still, the SEC continues to state that it expects RIA firms to have business continuity plans as part of their fiduciary obligation.

In my view, a business continuity plan for financial advisors is just good business. Here’s everything you need to know to get started.

What is a business continuity plan?

A business continuity plan for financial advisors is an agreement you put in place with a like-minded advisory firm. In addition to sharing similar values, investing philosophy and company culture, the firm should be of similar size or larger and have the capacity to take care of your clients and your team, and pay your surviving spouse or estate in the event of your sudden demise or incapacitation.

I see a business continuity agreement very much like an insurance agreement that protects the most valuable thing you own: your business and, along with that, your clients’ assets and your family’s inheritance. It spells out the events that will trigger the activation of the agreement, the terms of the sale and, most importantly, allows the business continuity partner to step in and take over operations immediately.

If you don’t have a business continuity agreement in place and you suddenly pass away or can no longer work, your business’ value will decay quickly. Clients will leave, your team will be rudderless and your family will have to contend with low offers from opportunistic competitors eager to swoop in.

The difference between succession plans and business continuity plans

Many people view business continuity plans and succession plans as interchangeable. They are not. Each is equally important, but a succession plan is complex, comprehensive and strategic, often taking anywhere from five to eight years or more to complete. A business continuity plan is simple, straightforward and takes effect as soon as a triggering event happens.

This is exactly what happened when a Carson Group partner passed away. The advisor had a business continuity plan in place. And even before the funeral, we spoke with the widow and had the new advisor in place within a week. The business did not miss a beat and the family received the funds from the sale.

Business continuity agreements are also readily available and fairly standard. This is by design. The industry as a whole wants to make it easy for financial advisors to implement business continuity agreements. That’s why many broker-dealers, Offices of Supervisory Jurisdiction (OSJs) and larger, wealth advisory networks such as Carson Group have business continuity plans for their advisors.

The biggest difference between business continuity plans and succession plans? The overwhelming majority of business continuity agreements will never be executed. Remember, they only take effect in the event of a sudden death or disability.

That’s also why, generally speaking, the valuations in a continuity agreement will be less than if you were shopping the business as part of a succession strategy. A business continuity agreement is not a planned sale. The purpose is to protect what you’ve built and achieve a reasonable price for the asset.

Key considerations when selecting a business continuity partner

Cultural fit and capacity – specifically, capacity to serve your clients, take on your team and pay your estate – are essential when identifying a business continuity partner.

The objective is to find a partner who shares your culture, investing philosophy and behaviors. Look to your own value proposition and compare it to your prospective partner’s. You should see “fiduciaries,” “high client value” or “we lead with planning.” These cultural attributes will ensure your clients and your people are treated in the same way you treat them – and that decisions are considered and made in line with your values and approach.

Once you have cultural alignment, then focus on capacity. It’s critical to find a business continuity partner with the resources in place to be able to take on your clients, keep your staff and pay your beneficiaries. As a result, business continuity agreements for financial advisors tend to be with bigger firms that have the capacity to meet all of those requirements.

Getting started

Creating your business continuity agreement starts with a conversation. Talk to your broker-dealer or OSJ. If you are an RIA, talk to the firm that helps you with compliance. If you don’t have a plan in place – or you’re unsure or uneasy about a plan that you were required to sign – then talk to Carson. We can connect you with a partner in our network who shares your values, or we can act as a backstop if needed.

If you do want to select a peer as a business continuity partner, take a close look at your local network. Focus on bigger producers in your city or advisors you may have met at FPA meetings, for example. A business continuity partner can be a competitor who may also be a succession plan option down the road. You may decide to become business continuity partners for each other. If you are considering peers, be sure a potential partner is either a similar age or younger.

Generally speaking, it can be difficult to find an internal business continuity partner. They are likely a W-2 advisor (i.e., paid employee) and may not have the capital, entrepreneurial spirit or business acumen to run the business.

Once you’ve decided on a suitable business continuity partner, be sure to communicate the plan to your staff, clients and family.

Elements of a business continuity agreement

Your business continuity agreement is a legal document that should spell out:

  • How the agreement is triggered.
  • The valuation (this is typically a multiple of revenue).
  • Provisions to protect employees.
  • Provisions to protect the buyer.
  • Non-compete and non-solicitation protections.
  • The recipient of the proceeds from the sale.

You will likely want to work with your attorney to complete the documentation.

Next steps

A business continuity plan for financial advisors will help you protect your existing clients and book of business, your team and your family in the event of your sudden death or incapacitation. It’s something every financial advisor should put in place and it’s simple to do. Business continuity agreements are readily available at a nominal cost. They are the insurance that every financial advisor needs.

While a business content plan and succession plan are different, they are related. And it is possible and, in some cases, probable that a business continuity partner can evolve into a succession partner. To learn more, download More Than Just A Back-Up Plan: How One Fiirm Found A Succession Plan Through Partnership.

The Essentials of Succession Planning for Financial Advisors

The Essentials of Succession Planning for Financial Advisors

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