RIAs spend much of their professional lives helping clients prepare for the future. But what about your firm’s future? The truth is, many RIAs will put off their own succession planning, much the same way as some clients will put off their retirement planning. But without the proper planning, risks quickly multiply, whether you take an expected retirement or suffer an untimely death or incapacitation.
The right succession plan sets the future you up for success and protects your firm, partners, employees and clients. Here’s a look at six RIA succession planning risks to be aware of and what to do about them.
About the Risk: Why Succession Planning Matters
Having a well-defined succession plan makes sense, considering how much fiduciary responsibility an RIA shoulders. Your clients’ futures rely on you and your ability to make timely and prudent financial decisions. You help families achieve their dreams, maintain comfort in retirement and build legacies for future generations. When a problem inevitably arises, you use your knowledge and skills to find a suitable solution and meet the needs of the stakeholders. So if something were to happen to you, you would definitely be missed.
Without a succession plan in place, there’s obviously a heightened risk for current clients, colleagues and partners, as they struggle to find another professional to fill your shoes and continue your work. But past clients and partners can also be put at risk. Even your business entity, personal assets and family can be affected if a professional negligence claim arises after your retirement, death or incapacitation.
What Can Go Wrong: 6 Risks for RIAs
Planning for what comes after you leave your firm comes with its own risks. E&O, cyber and other issues can regularly result in lawsuits under normal conditions. That risk is heightened without a plan. If you were to die or become incapacitated, the risk remains:
- If a former client or business partner discovered a problem, you wouldn’t be able to respond.
- If the dispute escalated into a lawsuit, there may be no way for your firm, insurance company and legal representation to defend you or assist you in your own defense.
Claims that seek damages against your business are harmful enough. However, lawsuits can also target you individually. In some cases, the courts will allow so-called “corporate veil” protections to be “pierced,” giving a claimant access to your personal assets or estate, including funds that were meant to provide for your family in case of an untimely death.
Even in the case of a temporary incapacitating illness, a succession plan is important. While death is final, it is possible to wake up one day and find a short but serious illness has caused added hardship impacting your business, financial assets and reputation. Most commonly, RIAs will need to guard against these six potential problems:
1. Inadequate Preparations
The most common risk seen in RIA succession planning is inadequate planning. Such efforts, that often amount to “too little, too late,” will lead to other problems. Procrastination can mean your important decisions get rushed as time becomes short, and without all the necessary information, leading to worse outcomes. Planning procrastination can also result in missed opportunities, with the loss of valuable employees or clients who are frustrated or worried about a firm’s indecisive approach. Either could eventually lead to an increased risk of claims.
2. Unprepared Successors
Even when an RIA’s succession planning is completed in a timely manner, a higher level of risk can remain if your successors aren’t properly prepared for their roles and duties. Yet failing to involve key employees early in the process is common. Risks multiply when employees aren’t trained or introduced to clients and can include reduced confidence in the firm, loss of clients and revenue, or an incidence of increased professional errors that could result in client losses, regulatory penalties or insurance claims.
3. Strained Relationships
Employees aren’t the only ones who need to be involved in the process. Clients also need to be notified at an appropriate time of your plans to retire or in the event of your incapacitation or death. A lack of communication here can lead to strained relationships with clients. This is not only a risk when it comes to maintaining and growing relationships, miscommunication is also a leading cause of claims against financial professionals.
4. Insufficient Documentation
As any RIA knows, thorough documentation is key to managing risk. The same goes for your succession planning. A number of problems can arise when important parts of your plan are not properly documented in writing. Who, what, when, where and how are all key questions to address, but are sometimes neglected. For instance, legal documentation of buy-sell or equity purchase agreements and employee ownership plans could be lacking. Wills and estate plan documents may also be needed in the event of an untimely death. Otherwise, disagreements and confusion about what to do, when and how will arise that lead to uncertainty affecting clients and firm business.
5. Missing Expertise
Even when an RIA follows through on planning, documentation, successor training and client notification, there’s still a risk that something important was overlooked along the way. Succession planning is complex. Getting things right often requires outside legal, financial or business expertise, but many neglect it. Planning without these crucial subject matter experts may lead to legal liabilities, regulatory issues, human resources challenges or suboptimal performance for the business.
6. Unexpected Events
RIAs who help others prepare for the future know this phrase well: Things don’t always go according to plan. Yet some still neglect their own contingency planning. Succession planning timelines can cover years or even decades. It’s inevitable that something will come up during such a long time period that requires you to revisit or change at least a small part of your plan. An inflexible plan can become a liability as bad as having little or no planning if things were to happen at the wrong moment. In such an event, all the previous risks — from rushed decisions to strained relationships and legal liabilities — can resurface and lead to a claim.
How to Make a Succession Plan: 5 Things to Do
It’s worth the time and effort to create a well-thought-out succession plan for when you retire, or in case you do die unexpectedly or become incapacitated. Planning for this risk is not unlike planning for other business risks and follows a set process.
- Consider possible risk scenarios. Make a list of possible events that could suddenly take you away from your work, either temporarily or permanently. Examples might include having a serious accident, experiencing a sudden health emergency or receiving a terminal medical diagnosis.
- Create plans for the biggest risks. Make plans to address the most likely and most severe risks. Since each risk may be different, a plan should be tailored for each. The key things to cover are the triggers that will set the plan in motion, your firm’s immediate response, the names of who to inform and involve, a list of each of these persons’ key responsibilities and a timeline for when each of the plan’s action steps should occur.
- Organize your documentation. Organize everything that the persons you designate will need to carry out your succession plan. This could include client files, business records, financial files and more. Use a safe or electronic passwords that keep the materials secure while also allowing access to the right people.
- Share it with the right people. Sit down with one or more trusted colleagues, employees or family members to discuss your plan. Like a last will and testament, a succession plan sitting in drawer does no good. It’s important for someone to know your plan exists, when to put it into action and where to go for the files and documents needed to carry it out.
- Review and update as needed. Take time to review your succession plan regularly and whenever something important changes, such as when you get a new client or make a change to your business. If a change creates a new risk your plan doesn’t cover, update your plan to address for it.
How to Further Protect Your Firm
While it may be an uncomfortable or even morbid topic, everyone gets older and the unexpected is always possible. Planning for your succession is really no different than working with your clients to help them plan their own future. It’s a risk management tool that helps protect you, your business and your clients.
Along with a succession plan, it’s important to make sure you carry the right insurance. Lockton Affinity Advisor has decades of experience working with RIAs, broker-dealers and other financial services professionals to help make sure their businesses are ready for the future. With us, you can find tailored solutions that meet custodian requirements and address top risks.
Lockton Affinity Advisor offers broad market access and proprietary solutions, including E&O, Cyber and Crime coverages, with best-in-class service. Visit us online today to learn more and get started.
