December 12, 2012 / 8:56 PM / in 5 years

COMPLY-Advisers who ignore death may irk regulators while alive

Dec 12 (Reuters) - 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 compliance professionals.

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 behalf.

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 Austin, Texas.

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 Commissioner.


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 Genworth’s Matrisian.

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,” Matrisian said.

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