How an RIA should prepare for the worst

April 7, 2010 — 5:45 AM UTC by Les Abromovitz, Guest Columnist

1 Comment

I read an interesting profile on RIABiz about a California advisor with a thriving practice who sold his ownership interest in the firm after being diagnosed with prostate cancer. The article reminded me that I should go in for a physical instead of diagnosing my aches and pains using Google. The advisor’s situation also reinforces the need for registered investment advisors (RIAs) to implement a disaster recovery plan, which should include succession planning.

Although the advisor profiled in Brooke Southall’s article has made a full recovery and plans to work a minimum of 10 more years, RIAs owe a fiduciary duty to their clients to prepare for disasters and other contingencies such as death or disability. If an advisor does not have a disaster recovery plan in place, clients will also suffer if a catastrophe occurs.

Expect a compliance disaster if you don’t put a plan in place

When securities examiners come calling, they are likely to ask about your disaster recovery plan. The plan should demonstrate that your advisory firm can continue to operate if a disaster occurs. An RIA’s plan should include contact information for the advisor’s key business partners, as well as employees. Securities examiners expect RIAs to test their plans at least once per year to make certain they will be effective. RIAs should retain documentation verifying that this testing took place.

A comprehensive disaster recovery plan should also address succession planning. Just as a hurricane, earthquake, tornado, or fire may make it almost impossible for an RIA to operate, the loss of a key individual in a small advisory firm might adversely affect clients and bring money management to a grinding halt. Succession planning contemplates situations where an indispensable employee is lost because of death, disability, retirement, or some other reason. Having a plan in place lets securities examiners know that clients are protected.

Succession planning ensures a smooth transition if an owner or principal of the firm decides to retire, scale back or leave the business. Effective succession planning can benefit clients and the advisor who is retiring or leaving the business. Knowing there is a succession plan in place is reassuring to clients, as well as employees who know that the advisory business will remain viable for years to come.

Hope for the best and plan for the worst

Whether we own an advisory business or not, most of us plan for events we would rather not think about, such as death, disability, or incapacity. Many of us also plan for retirement or even a different career. Similarly, advisors need to protect their advisory business and their clients for the day when they do not show up at work, planned or unplanned. Succession planning addresses issues such as:

  • Deciding whether an owner or principal wants to retire, sell the company, or continue to run the firm on a part-time or full-time basis;
  • Determining if there are family issues or estate planning considerations that affect the succession plan;
  • Calculating the value of the business;
  • Identifying potential buyers, including internal candidates, and how the sale will be financed; and
  • Evaluating the tax ramifications of any and all alternatives.

It is always a good idea to consult with tax or legal professionals who specialize in succession planning, even if members of the RIA are CPAs and attorneys. Succession planning may involve sophisticated estate planning, negotiating buy-sell agreements, and valuation issues that require additional expertise.

Successful succession planning

Succession planning facilitates a smooth transition of ownership and avoids a disruption of service to clients. Clients are also relieved if the firm they trust will be available to counsel their children and grandchildren. One strategy is for senior members of the firm to gradually sell off their equity interest to younger investment advisor representatives.

Although solo practitioners have fewer options, succession planning is every bit as important. One possibility is for two solo practitioners to negotiate an agreement to take over each other’s practice if one of them dies or becomes disabled.

By planning ahead, advisors can transfer their ownership at a pre-agreed fair market value that provides for their loved ones. If no agreement is in place, there may be disputes over the value and control of the advisory business. Ultimately, this may result in costly and protracted litigation or a forced liquidation of the firm. And that would truly be a disaster that could easily have been avoided.

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 or through He can be reached at 561-330-7645, Ext. 213, or at

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Michael Price said:

March 17, 2011 — 7:09 PM UTC

Hi Les, I apologize this comment is so overdue but I just wanted to say how much I enjoyed this article, especially your wise insistence on “hoping for the best and planning for the worst.” It is so important that RIAs implement appropriate systems in their firms to both protect against threat, but also make it possible to quickly and reliably recover from disasters of all sizes should they ever occur.
If you have a second, you may enjoy taking a look at one of my articles, the World’s Worst Disaster Recovery Plan (
The worst part is this plan was actually passed by an SEC auditor!

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