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Coronavirus and What Advisors Need to Know about Business Continuity and Contingency Buyout Planning
Financial advisors are in the business of risk management. They are responsible for helping their clients mitigate market risk, insurance risk, retirement risk, and more. They also help their clients plan for the unexpected. “What if” conversations are frequent, and motivating clients to be proactive is sometimes an uphill battle. Procrastination often wins.
In March, the Coronavirus brought the U.S. economy to a screeching halt, and advisors found the spotlight focused on their business planning. Now, they too had to face their potential planning shortcomings and answer the hard questions, such as “What if my team or I can’t work?” and “What if the unimaginable happens and I don’t survive this outbreak?”
Surprisingly, 55% of advisors do not have a business continuity plan (BCP).1 Additionally, should the unimaginable happen, financial advisors without a contingency buyout plan (CBP) can leave their loved ones with fewer assets and their clients’ accounts orphaned.
If you currently do not have BCP or a CBP, here is some insight to help you answer the hard questions.
“What if I can’t work due to a disaster that disrupts our normal business activities?”
A business continuity plan exists to keep your office running when you are unable to work for any reason, from electrical outages to natural disasters. BCPs cover procedures for the timely resumption of critical business operations and should be tested annually to ensure effectiveness at business resumption. If you are employed by a wirehouse, an insurance company, or other large financial institution, you likely do not need to create a BCP because your employer has a plan in place for you to follow.
“A BCP and CBP are the first priorities for advisors who transition to independence,” explained Soliman Popal, VP of branch development for Financial Advocates. “Advisors are used to having their home offices handle these plans, and if they do not resolve them both right away, they commonly become overlooked until it’s too late.”
Your BCP should outline the following bases:
- Data back-up and recovery (hard copy and electronic)
- Mission-critical systems
- Financial and operational assessments
- Communications between customers and the office and between the office and its employees
- Alternate physical location of employees
- Critical business constituent, bank, and counter-party impact
- Regulatory reporting and communication with regulators
- Plans to ensure customers’ prompt access to their funds and securities if the office is unable to continue its business
There are valuable online resources you can use, like Ready.gov, so you don’t have to start from scratch. However, it’s best to work with a business development consultant in the financial services industry to create a BCP. They are knowledgeable about advisory practice businesses and the required regulations for these plans.
Now, let’s help you answer the next question.
“What if the unimaginable happens, and I don’t survive this outbreak?”
No one enjoys discussing their mortality. However, when an advisor does not answer the above question, they risk their clients’ accounts being orphaned and, more importantly, their loved ones receiving less.
“Independent advisors who don’t have a CBP are leaving the door open to their book being bought at a deep discount,” explained Popal. “Additionally, if an advisor has a succession plan, they should not assume that plan covers an unexpected and untimely death. Succession plans are for planned future transactions. CBPs are for unplanned events.”
CBPs vary based on how the advisory practice operates. For captive advisors, when the unimaginable happens, their clients’ accounts are reassigned or become house accounts. Their heirs receive compensation with a life insurance policy or a pre-agreed upon lump sum payment from the company. Corporate independent advisors often have a CBP with their broker-dealer. However, many agree to the terms without thoroughly evaluating their options and exploring less costly agreements. Doing the legwork upfront can ensure your loved ones receive a larger payout.
Independent advisors have two primary options when creating a CBP. They can identify anyone as a third party for their CBP and set the percentage per dollar for the buyout in advance. At the time of the advisor’s death, the value of the book is calculated, and the agreed-upon price is paid by the third party.
Another option for independent advisors is to partner with an independent advisory group, such as Financial Advocates, that agrees to pay a higher buyout rate than most broker-dealers. They maintain their independence and relationship with the broker-dealer but gain a more significant share for their heirs in the CBP.
There is no time like the present to make sure all your business plans are up to date and serve the best interests of your clients, your employees, and those you love. If you need a BCP, CBP, or want someone to review your current plans, contact us. Our business development consultants are proficient in practice management and business planning for independent financial advisors.