Firms that don’t have a succession plan in place could be placing themselves at risk for one of the worst-case scenarios.
A recent webinar said that one such an event could be the untimely death of a financial adviser, which, without a clear succession plan, could lead to catastrophic outcomes for the firm and clients.
Australian Independent Compliance Solutions founder and managing director Cheyenne Walker said the first thing to consider is whether the adviser is self-licensed or licensed through another entity.
For a third-party licensee, the licensee owns the client through a contract, Walker said, and the main thing the licensee must do is look after the clients.
“In a terrible situation like that they need to ensure the clients are getting serviced and that’s really important when you come down to ongoing services that are in place,” Walker said.
“We know that when we don’t deliver those services, it’s about refunding fees. A licensee needs to ensure that the clients are looked after.”
Tony Stephens, co-owner and joint principal of advice consultancy Business Health, said an adviser in a larger licensee could appoint another adviser to service those clients, at least in the short term.
“What we do know from speaking to a number of licensees is that in some licensee agreements there is the option to do that – where they might have a locum adviser come in,” Stephens said.
“In many agreements that we’ve seen… there is no agreement in place to do that and therefore what they’re going to have to do is try and find an adviser to start servicing these clients as well as servicing their own clients. That’s not going to be easy to do.”
Stephens said for those firms working with a third-party licensee, it’s worth considering whether there is an adviser inside the network who can be trusted with the responsibility to service those clients and to make that a formal arrangement.
“The agreement would say these people would automatically start servicing the clients again within the same licensee,” Stephens said. “If they have to go another licensee that gets complicated.”
But for a self-licensed adviser – who is commonly going to be the responsible manager as well – Walker said the business won’t have the necessary skills to legally continue to operate.
Without at that competency in place, the licensee suspends if there is no one to take care of the clients or the responsible manager duties, she added.
“Therefore, if the adviser isn’t prepared and doesn’t have somebody who has the skills or hasn’t trained somebody internally to step in those situations the license can’t give the advice,” Walker said.
“It’s really important for self-licensees that they actually make these arrangements in place beforehand.
“From an ASIC point of view, as soon as the responsible manager doesn’t exist – they pass away or something happens to them and they can’t carry out their duties – it means that they license has a gap there. Therefore, the shouldn’t and can’t be provided to clients.”
The solution is to have someone in training so satisfy those requirements if the responsible manager does pass away.
“If a responsible manager did pass away, you still have to notify ASIC within 10 business days, if it’s a key person that’s only five business days,” Walker said.
“ASIC will work with you as long as you work with ASIC to put somebody in place.”
If clients are no longer being served, then its up to the licensee to switch off fees until a new one is appointed. Walker says the firm needs to work with compliance managers to turn off fees.
Furthermore, it’s important to be able to have fees turned on as soon as possible – by servicing them with an adviser – to help generate revenue to pay for staff and other business expenses.
“Work with compliance managers to turn off fees… because virtually the refunds would pile up,” Walker said.
There are also implications if a new person is buying the business. “It’s like changing licensee, there’s still all those requirements that need to be fulfilled,” Walker said.
For reasons like the unexpected, Walker said it’s always worth having a succession plan in pace.
“A business should be ready at all times,” Walker said. “You don’t know when maybe a buyer will come through the door.”
