I once knew an advisor who went out of state on vacation. She had an accident so severe it required several rounds of surgery. She was unable to come home for some time.
While she had a small staff, she was the only advisor, and there wasn’t anyone else licensed to serve as a backup and handle client work. This advisor thought she was prepared for her firm to keep running if something should happen to her, but she wasn’t.
There was another time I was working at a firm and, unfortunately, we had an advisor pass away. Their will wasn’t updated and their personal life was incredibly complex for the business because he still had ties to a previous spouse where she was entitled to part of the firm.
You don’t want to have either of these situations happen to you, and that’s why continuity planning is so critical.
There are two types of continuity plans – operational and key person. In this blog post, I’m going to focus solely on building a key person continuity plan so that what happened to the advisors I just wrote about doesn’t happen to you. This is helpful for both single- and multiple-advisor firms.
A key person continuity plan is for when there is a death or disability of the CEO, lead advisor or a key team member. This is important to have in place so you can make sure your clients are taken care of!
Before you even make a contingency plan, you need to set yourself up for success. The first thing to do is figure out what type of plan would be most appropriate. There are two major umbrellas: single advisor key person continuity plans and multiple-advisor continuity plans.
And as we dive into this subject, keep in mind that continuity plans are really just about being prepared for the unexpected so your clients are taken care of.
The Big Four Things to Get in Place First
Before you dive into building your continuity plan, I recommend getting three things in place: an updated valuation, an insurance needs analysis and updated procedure manuals for all the procedures in your firm.
One of the first things I recommend is getting an updated valuation. Ideally, you should do this every two to three years. This is critical to have in place in case something happens to you or another key member of the firm. Having an updated valuation will better position your firm to be sold for a fair value. Having that information updated and available is important to make sure you’re taking care of your team, clients and family in the best way possible.
In addition, do an insurance needs analysis and update your policy to ensure your family is covered in case something happens to you.
You’ll also want to update all your procedure manuals for your firm. This is a key foundation to keep things running smoothly in your (or any other key employees’) absence.
Lastly, check in with your compliance department or regulatory bodies (SEC or Finra, for example) to see what frameworks and templates are available to you.
Single Advisor Key Person Continuity Plans
If you run a single-advisor firm, your firm might cease to exist if you were to die suddenly or experience a long-term disability.
We know it’s tough to think about these things, but you’re a planner and advisor, and you know it to be true that if these things happen, it will affect your clients who still need you to serve them; your team members who rely on the business for their paycheck; and your family who depends on your business’s income for their survival.
One option is to craft a single-advisor continuity agreement with another firm to ensure your clients are taken care of. You should form an agreement with a firm that has a similar business model. You must conduct a needs analysis for insurance purposes.
Because single-advisor firms face different challenges than larger firms, it’s even more critical to have a continuity plan in place to mitigate risk and detrimental impact to your clients, staff and family. When you’re picking another firm to forge an agreement with, ensure your agreement includes supporting clients and retaining your team members. You’ll also want to vet firms to ensure their culture and values align with yours.
Also, make sure that your agreement details activation triggers (what is the event that must happen for the agreement to become active) and compensation terms.
Multiple-Advisor Firms: Partner Firms
There are two categories of multiple-advisor firms that require different key-person contingency planning. The first is partner firms and the second is single CEO firms, covered in the next section.
This type of agreement is appropriate for larger partner firms where at least two of the advisors are relatively equal-share partners. This type of plan is typically included in a buy-sell agreement that’s part of your operating agreement. You could also have a separate buy-sell agreement.
You may be able to fund the buy-sell agreement with insurance, which can help mitigate financial risks associated with any unforeseen events. Generally, key-person contingency planning for partners with equity involves the surviving partners buying out the incapacitated or deceased partner (or their family, as would have been helpful in the case of the advisor with the complicated personal life I mentioned earlier).
So having an up-to-date business valuation can help facilitate this process. Plus, conducting a pre-event valuation allows equity partners to agree on the business’s value under normal circumstances. Because if the firm needs to sell during an emotional event, this can potentially lead to the buyer undervaluing the firm, which isn’t optimal for the seller.
Lastly, I always like to recommend that when traveling to events or meetings, that partners consider not traveling together on the same flight for contingency purposes. I know the chances of dying in an airplane crash are 1 in 11 million – and that’s a long shot – but so many partners from the same offices travel together and it worries me. It’s best to play it safe!
Multiple-Advisor Firms: Single-CEO or Advisor-Owned Firms
The second category of multiple-advisor firms is single-CEO or advisor-owned firms. This type of plan is generally appropriate for multi-advisor firms with one or more associate non-equity advisors at the firm.
This approach is a combination of both the plan for partnership firms and that for single advisor firms. Earlier, I recommended getting an insurance needs analysis done. You should also get the recommended insurance so that you don’t put your family at risk should something happen to you. Plus, you can also forge an agreement with external firms with similar cultures and values to ensure the firm keeps serving clients and keeps paying employees.
And if you have non-equity holding advisors, you can also put a contingency strategy in place to give them the option to purchase the business should something happen to you. This in itself presents a slew of challenges that must be addressed, like how the associate advisors would finance the deal and how to transition ownership.
One way to address that proactively would be to introduce fractional ownership gradually to associate advisors now. We know, that might be tough for some advisors to transfer ownership to somebody they feel isn’t ready, but you could always include provisions in your ownership agreements for buy-out that allows the majority owner to retract equity in case of unforeseen circumstances.
This type of equity ownership for associates is crucial if your firm doesn’t have partners, because buy-sell agreements are usually only for partners. Consider gifting, selling or having associates finance minority ownership (either financed by you or another financial institution). Starting with giving away a small percentage in your firm is a giant step for you, but it’s also a giant step for the future of your firm and continuing your legacy.
Bringing It All Together
It might seem overwhelming to put together a key person continuity plan, but if you break it down into these different elements, it can be much more palatable than if you try to do it all at once.
And once you have the plan in place, you want to make sure you communicate the plan and test it out so you can make adjustments and update it at least annually. Be sure that those people who will be the ones keeping things afloat have all the information they need.
This isn’t an easy task. And a coach can help guide you through the process. Get in touch with us today to see how we can help you on the journey of creating your continuity plan.
