Tornadoes, floods and hurricanes, sure, but death, disability and bad succession plans can also be disastrous for clients
October 29, 2012 — 3:22 PM UTC by Les Abromovitz, Guest Columnist
Brooke’s Note: We’re re-publishing this article for people who might be in the right mindset today to consider its message.
RIAs must do more than just prepare for financial disasters.
In case you aren’t feeling anxious enough about Standard and Poor’s downgrade of United States debt, it’s time to think about natural disasters, death, disability, and all of the potential calamities that might affect your advisory business. If you don’t keep your disaster recovery and business continuity plan up-to-date, securities regulators will downgrade your compliance program. See: The SEC wants you to consider the catastrophes.
Plans must be updated and tested regularly
In a recent Dilbert comic strip, the socially-awkward engineer prepared for the complete meltdown of the country’s financial system by stocking his house with food, water, batteries, flashlights, and gold coins. His co-worker had no plan other than memorizing Dilbert’s home address. To satisfy securities regulators, however, Registered Investment Advisers (“RIAs”) must implement a much more thorough plan in case a disaster occurs.
During every season of the year, natural disasters threaten RIAs and their clients. In the spring and summer of 2011, tornadoes ravaged the Midwest and even hit states like Massachusetts. Floods destroyed homes and businesses in several states. Right now, several areas of the country are in the middle of hurricane season.
In a speech on March 21, 2011 at the IA Watch Annual IA Compliance Best Practices Seminar, Carlo V. di Florio, the director of the Office of Compliance Examinations and Inspections discussed best practices for RIAs. Among other areas focused on during examinations, the SEC will pay close attention to an RIA’s business continuity and disaster recovery plan.
According to di Florio, “Business continuity and disaster recovery planning has always been an important part of our overall examination program, including for investment advisers. The recent natural disasters in Japan and New Zealand highlight the continued importance of this for firms and markets.”
Breaching your fiduciary duty is a compliance disaster
RIAs owe a fiduciary duty to their clients to prepare for disasters and other events that might put their advisory firms in jeopardy. If an RIA does not have a disaster recovery plan in place, clients’ financial well-being may be at risk through no fault of their own.
A disaster recovery plan should articulate the steps that an RIA will take in situations where service to clients might be interrupted. That plan should be a formal document that is sent to employees. The plan should be updated at regular intervals, and each revision should be shared with employees.
Employees should be fully aware of their responsibilities in the event that business operations are interrupted. A comprehensive disaster recovery plan should address a wide range of contingencies, such as specifying an alternative location for employees to meet and conduct business in the event of a disaster.
An important element of a disaster recovery plan is having the latest contact information on file. An RIA should have ready access to current contact information for clients, employees, regulators, custodians, and service providers.
Protecting sensitive information is at the heart of every disaster recovery plan. The plan should stipulate that computer systems must be backed up regularly. An RIA should test its ability to store, maintain, and recover electronic data that is backed up. The results of this testing should be documented and retained in the RIA’s books and records. The firm should also make certain that third-parties, like broker-dealers, have implemented an effective disaster recovery plan.
Succession planning does more than just please regulators
Succession planning does more than just satisfy your compliance obligations. The process is particularly important at small firms in order to avoid a situation where clients stop by to find the office is closed forever, because the owner died unexpectedly.
The planning process facilitates a smooth transition of ownership and avoids a disruption of service to clients. Having a succession plan in place protects clients, as well as employees who should sleep better knowing the business will continue after a key person passes away or leaves the firm. Clients and prospective clients will usually feel more secure knowing that their advisory firm can provide service for their heirs.
By engaging in succession planning, advisers can arrange for an orderly transition of their business to a new owner or team. The process can help to avoid disputes over the control and value of an advisory business. A solid plan can help to minimize the potential tax, compliance, and legal ramifications that might arise.
Hopefully, there are no other Standard and Poor’s downgrades or potential government shutdowns that will cause you anxiety and emotional distress. If there are, succession planning may be even more urgent than you think.
Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.
Mentioned in this article:
NCS Regulatory Compliance
Consulting Firm, Compliance Expert, RIA Set-up Firm, Regulatory Consultant
Top Executive: Mark Alcaide, COO/Partner
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