Dec 12 Financial advisers and the clients they
counsel often share a key attribute: an aversion to confronting
their own mortality.
Investors who wait too long to plan for the end might find
their estate mired in a court battle. But advisers who fail to
plan for their own demise may find U.S. securities regulators
confronting it for them.
Securities regulations require advisers to have business
continuity plans, which typically include contingencies for a
natural disasters or severe weather. But advisers often overlook
the possibility of their sudden death or disability, say
Many advisers simply ignore the question of how their
businesses would continue without them, according to Matt
Matrisian, director of practice management for Genworth
Financial Wealth Management, a unit of Genworth Financial Inc
. The issue can be especially tricky for thousands of
small or solo investment advisers registered with state
regulators or the U.S. Securities and Exchange Commission.
An adviser's unexpected death or disability can leave
clients scrambling for information about everything from whether
to place trades, or even where to find their money. Regulators,
during routine examinations, often ask advisers about their plan
to prevent those problems, say compliance professionals.
Advisers who don't have one will need to quickly comply - or
draw unnecessary attention to themselves from examiners. At
best, regulators will note the lapses in a letter to the firm
and expect them to be fixed. Not complying can lead to fines.
"As their financial adviser, it's your fiduciary
responsibility to make sure your clients are taken care of
should something happen to you," Matrisian said.
Some solo advisers take a misguided approach to the
question: "I just tell my clients that if I die, they have to
find another adviser," said one Virginia investment adviser.
Custodial firms holding client funds for advisers, such as units
of Charles Schwab & Co. and TD Ameritrade Inc,
will still be there even if he is not, the adviser said.
But it is more complicated than that, said Bryan Baas,
director of risk oversight, for TD Ameritrade Institutional, the
bank's custodial unit for investment advisers. Agreements that
advisers' clients must sign with custodians like TD Ameritrade
specify the name of the adviser who is allowed to trade on their
Baas recalled instances in which TD faced the unenviable
task of being first to notify a dead adviser's clients that no
one was managing their accounts.
While clients still have authority over their accounts in
those circumstances, they may not have the know-how to place
trades, leaving them in a difficult spot if they suddenly have
to make decisions during a period of market turmoil, said
Benette Zivley, a lawyer in Munsch Hardt Kopf & Harr, P.C. in
But solo advisers can spare clients that uncertainty by
developing a plan to transfer the business to another adviser if
they die. They can also give instructions for a worst-case
scenario. That might include posting contact information for the
future adviser in an "emergency" section on the firm's website.
"If you're a one-man shop, you have to be clear about who to
contact," said Zivley, who is also a former Texas Securities
Advisers in small offices have far less to worry about than
solo-practitioners. About one-third of the 10,500 SEC-registered
investment advisers have between one and five employees,
according to the Investment Adviser Association, a trade-group.
At New York-based Heron Financial Group, two full-time
employees - a wealth adviser and portfolio manager - could help
if the firm's president and founder, David Edwards, died,
Edwards said. What's more, the long-term investing strategy in
practice for most of its clients would buy some time for them
until the business was wound down, Edwards said.
"We're not doing anything particularly clever. These
strategies can go six months untouched," he said.
Solo-advisers, on the other hand, should do their homework
and then develop an agreement for someone to take over the
business if they die. Advisers should first hire a business
evaluation expert to figure out what their business is worth.
Then, look for people who share similar views about
investment philosophy, customer service, and other issues, said
Finding a match requires conducting due diligence on the
adviser's client base and service model - a step that could mean
hiring a consultant to do the research. The two advisers will
also need to work out how the stand-in adviser will pay for the
business. Among the possibilities: paying a percentage of
revenues over time to the dead adviser's surviving family.
That's another reason to not put off planning.
"It can certainly get complex depending on deal structure,"