Pinnacle Advisory Group and Pinnacle Advisor Solutions have been very active in educating advisors about the merits of succession planning. We have long argued that succession planning is necessary to ensure continuity of service to clients as well as to ensure that an advisor realizes the full value of the firm in the event of death, disability, or retirement. When we learned this summer that NASAA had proposed a new rule requiring state regulated advisors to have a succession plan in place, we wanted to make sure everyone had the information they needed to be prepared.
So last week, we hosted a fantastic panel discussion on the proposed rule, led by Michael Kitces (Partner and Director of Research at Pinnacle Advisory Group, author of The Kitces Report and Nerd’s Eye View, and Practice Management Editor of the Journal of Financial Planning). Our guests included Patricia Struck (Chairperson of Securities Section of NASAA, former President of NASAA, and administrator of the Wisconsin Department of Financial Institutions Division of Securities), Chris Winn (CEO of leading compliance and consulting firm AdvisorAssist) and myself (VP of Strategic Partnerships at Pinnacle Advisor Solutions).
Here are the key takeaways from the discussion.
- Who? The proposed rule impacts state-regulated RIAs – typically RIAs with AUM of less than $100MM. With that said, Chris Winn suggested that this issue is also on the SEC’s radar, even though it has issued no specific guidance.
- What? The proposed rule requires that advisors have business interruption and key-person plans in place to ensure continuity of service in keeping with their fiduciary duty to clients. The rule will require there be a plan, though NASAA is not mandating any particular type of plan.
- When? NASAA has studied this issue for one year, has been seeking public comment on the proposed rule since August 1st. The public comment period officially ends October 1st, but Patty suggested that people send in their comments even after the deadline. The proposed rule is expected to be formalized and made official in 2014 and state regulators will adopt the rule at varying paces in 2015.
- Why? The North American Securities Administrators Association is a rule-making organization for state regulators. At a very basic level, NASAA believes that continuity of service is fundamental to an advisor’s fiduciary responsibility to clients. NASAA decided to address this issue due to (a) the vast number of solo practitioners who are specifically vulnerable to key-person risk; (b) more frequent requests from state examiners for guidance; and (c) an interest in ensuring uniform rules nationwide. Moreover, NASAA believes that failure to address this issue can potentially harm clients resulting in regulatory action and lawsuits.
- How? Chris Winn recommended that advisors get started now. He believes succession planning is necessary to care for clients and to satisfy regulatory concerns, but he also believes it is a necessary part of running a successful practice. Specifically, he believes (a) a succession plan can be an attractive consideration to prospective clients, (b) it is necessary for the smooth operation of the business, (c) it has a direct impact on the value of your firm and (d) it is a necessary part of an advisor’s own personal financial planning. So he recommends that you get the process started even with an imperfect solution — and continue to incrementally improve the plan over time.
- How Will Advisors Respond? We believe this new rule will generally be well received by advisors. On the plus side, most advisors we speak to genuinely believe in their fiduciary responsibility to clients. Indeed, when advisors are asked for the reasons for a succession plan, caring for clients is by far the #1 reason. Realizing the value of the practice is a very distant second. The only concern independent advisors may have is how to get it done. More than 50% of advisors say they have looked for a good solution, but many have not succeeded.
- What Solutions are Available? There are four common solutions that advisors are looking at today. We would be happy to discuss your circumstances and the most appropriate options for you at any time. You can schedule a call by clicking < here >.
- Informal Agreement. Typically with a peer advisor in a local study group. The primary issue with this solution is that practices are often dissimilar and there is no specific and enforceable agreement. There is nothing that requires the successor advisor to actually handle your clients, nor is there any agreed upon value to be paid for those clients. This is the most common solution because there is no detail or contract.
- Internal Succession. This solution is very attractive for small ensembles. This allows the advisor to maintain his or her independence, and allows them to ensure the exact continuity of service and personnel that clients experience today. The common problems with this solution are (a) the successor subsequently leaves the firm (which happens much more often than you think) or (b) the successor cannot afford to purchase the firm. Solo practitioners looking to hire a junior advisor to become the successor frequently complain that they cannot find a suitable candidate.
- Sell to a Larger Firm. There is no shortage of companies willing to purchase your firm today. Indeed, everyone is a buyer and very few are sellers. Large independent RIAs and private-equity backed RIAs are very interested in growing by acquisition, so one solution is to join a larger firm and finish your career under their umbrella. The problem with this solution is threefold: (a) our experience is that independent advisors do not want to give up their independence; (b) if they do want to sell, there is often a huge gap between bid and ask prices; and (c) we hear stories from advisors who selected this route who wish they did not because promises were not kept (i.e., they were not given the independence or resources they were promised).
- Contingent Succession. Pinnacle Advisor Solutions launched a new solution – PRISM – in 2013 at the request of the independent advisors we were working with. This agreement says that upon death, disability or retirement, Pinnacle Advisory Group will service an advisor’s clients and compensate the advisor for the value of those clients as spelled out in the agreement. Importantly, the agreement is 100% revocable. The advisor has an effective succession planning solution in place but enjoys the freedom to change direction at any time (i.e., if they find a better solution or one of those large firms wants to acquire them for silly money).