While continuity plans are required by the U.S. Security and Exchange Commission (SEC), many advisors stop at the bare minimum, leaving their firm open to major disruption, and potentially an eroded value that leaves family or colleagues holding the bag.
The biggest thing to remember, according to Marcus Hagood, Director of Equity Management Solutions®️ at FP Transitions, "A continuity plan needs to be simple, clear, and fully executable in your absence." There can be no confusion of who is responsible for which aspects, and it must ensure the transitions can occur swiftly, legally, and financially to avoid any disruption to your clients.
Ensuring all of these pieces are operational on a moment's notice requires owners to have a current valuation and agreed upon continuity partner. This should - at a minimum - be reviewed every 12-18 months to ensure all parties are still willing and able.
The Basics of Continuity Planning:
What Is a Business Continuity Plan?
A business continuity plan is a critical document that ensures client service and asset management continues despite any disruption to the principal advisor or their business. While 90% of clients want their financial advisor to have a plan to protect their assets, only 10% of advisors have a written, executable continuity document that clearly defines what will happen to the business after an advisory owner's death or permanent disability.
Why Is Continuity Planning Important?
A continuity plan provides the ultimate peace of mind for clients and your business. Like flying a commercial aircraft with two pilots in the cockpit, a continuity plan ensures stakeholders are protected if the first officer is unavailable. This plan allows you to direct what will happen when you can no longer participate in business operations.
The SEC, most broker-dealers, and many insurance firms require that you have a plan in place to protect client assets. But you also need to safeguard your business and your family. Unfortunately, many companies fail to adopt a holistic approach to planning for the care of the business and employees and only focus on client needs.
The Details of Continuity Planning:The 4 Types of Continuity Plans
Advisory practices should create or augment their plans based on current needs and future goals. While every arrangement aids in the seamless transition of leadership during times of unexpected change, some options are better than others.
- Guardian Agreement (GOOD)
A Guardian Agreement assigns a legal custodian or guardian to run the company and service clients for a set period while the estate secures a buyer. Typically limited to six months, an outside individual steps in to ensure business operations continue without disruption. The success of this agreement depends mainly on the guardian's ability to temporarily take over when you need them.
- Buy-Sell Agreement (BETTER)
A Buy-Sell Agreement defines business sale terms to a qualified partner when a triggering event occurs. This common agreement allows a defined partner to step in immediately upon the death or disability of the primary partner, buy the practice from the disabled partner or their estate (if they are deceased), and take over the operations as part of that transition.
Unlike with a Guardian Agreement, the partners are provided a specified financial outcome with a clear description of the transition process and the methodology used to arrive at a purchase price. Your family or estate benefits more in this scenario than with a Guardian Agreement.
- Buy-Sell & Guardian Agreement (BEST)
As the name implies, this agreement combines the two previously described options.
- It assigns a guardian to run the business and service clients for a set period.
- It defines the terms of sale to that same guardian, who will commit to purchase the business when a triggering event occurs.
You experience the benefits of both agreements by having someone who can immediately step in as a legal custodian/guardian. Typically, this individual also agrees to purchase the business. A Buy-Sell & Guardian Agreement gives you the most comprehensive support and protection, shy of an internal succession.
- Internal Succession (OPTIMAL)
It's possible to build a sustainable business with continuity and succession incorporated into the entity's operational documentation. Internal succession is the optimal continuity arrangement since it is the least disruptive and can cover more than situations related to death or disability. Internal Succession could also help transition ownership to multiple owners already working in the business.
Where Continuity Plans Go Wrong
Identifying the right partner is crucial for the success of your business continuity plan. They should:
- Be a licensed financial advising professional willing to step into the role on at least a short-term basis.
- Possess the financial resources to support the business.
- Share a similar investment philosophy, stakeholder alignment, and views on fees and culture.
- Be someone you can trust not to violate a policy or a broker-dealer custodial relationship.
You can assign additional standards as needed.
Continuity Planning Tips
A well-written continuity plan provides straightforward guidance using plain, direct language. Consider these best practices as you create the document:
- Include details of annual valuation requirements.
- Schedule checkpoints that ensure guardian financing is ready and available.
- Share the plan with staff, clients, and your estate representatives.
- Mark your calendar for a continuity plan review at least every two years.
- Avoid an unfavorable deal structure by saying no to discounting business value under a death or disability scenario.
- Remain flexible, as changes to your business or retirement plans may mean your selected continuity partner is no longer a good fit.
FP Transitions’ proprietary Equity Management Solutions® membership program arms advisors with targeted key performance indicators based upon the industry’s most thorough wealth management benchmarking data, and includes the setup and annual review of your firm’s continuity plan. Learn more here, or schedule a free consultation to discover how FP Transitions can prepare your business for success.