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 Investment advisers often put off so-called "succession planning,"
the regulators say. But the problem could balloon as a growing
number of advisers approach retirement age, they say.
"Many of them literally keep going until they die," without leaving
a firm plan for taking care of clients after they aren't around,
said Patricia Struck, who heads the investment adviser committee of
the North American Securities Administrators Association (NASAA).
The group, whose members include U.S. state securities regulators,
has created a proposed model rule that would require
state-registered advisers to develop a business plan in the event of
their death or disability.
More than half of registered investment advisers are within 15 years
of expected retirement, according to a 2013 study by Cerulli
Associates, a research firm in Boston.
Advisers who die or become ill without a plan can leave clients in
the lurch. For example, clients may not know their next move in a
time-sensitive investment strategy or have to chase after refunds
for advisory fees they paid in advance. The situation comes up
often, said Struck, who also heads the securities division at
Wisconsin's Department of Financial Institutions.
Advisers who fail to plan for those issues could open themselves up
to more scrutiny from regulators, who often look for such plans when
examining firms, say compliance professionals.
An adviser's duty to act in clients' best interests has long obliged
investment advisers to plan for the possibility of their untimely
death or protracted illness. But that obligation is not typically
spelled out in black-and-white. Instead, it has evolved over time
through regulatory guidance and interpretations of advisers'
responsibilities.
The U.S. Securities and Exchange Commission, for example,
effectively mandates succession planning but through a broader
"catch-all" rule that mandates having a compliance program, among
other things. The Financial Industry Regulatory Authority, which
regulates brokerages, requires firms to have continuity plans so
they can assist customers during an "emergency or significant
business disruption."
NASAA's proposed rule would require that advisers make succession
plans. The proposal also requires separate continuity planning for
advisory businesses to run amid emergencies such as natural
disasters. The group unveiled the proposal in August and is
collecting suggestions from the public until Oct. 1. The rule, if
adopted, would be paired with guidance for advisers on how to
develop their plans.
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A requirement by states would still be a long time away. NASAA
members will vote on a plan by spring of 2015, said Struck. Even if
it passes, it would still be a model rule that lawmakers in
individual states could decide whether to adopt.
State regulators oversee small and mid-sized advisers managing up to
$100 million in assets. Many are solo firms or advisers with small
staff. Clients at such firms can still usually access their funds if
their adviser dies, because they are typically held at outside
brokerages.
Nicholas Olesen, an adviser in King of Prussia, Pennsylvania, isn't
waiting for directions from regulators.
Olesen, 30, and two other solo advisers have signed agreements with
each other to run each others' practices if needed. The three share
similar philosophies about business and investing, Olesen said, and
he doesn't want his clients left to flounder if he dies suddenly or
becomes unable to continue his work.
"I put a lot of blood sweat and tears into this," Olesen said. "I
don’t want it just going away."
(Reporting by Suzanne Barlyn; Editing by Cynthia Osterman)
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