Contingency and Transition Planning

Advisors whose primary objective is to continue working as long as possible — perhaps at a somewhat lesser pace while maintaining their lifestyle — are likely to benefit from having contingency and transition plans in place. In a sense, having such plans are like creating an insurance policy and an income annuity for the practice.

Of course, Finra Rule 4370 requires broker-dealers to develop and maintain a written business continuity and contingency plan and to establish procedures relating to an emergency or significant business disruption. Beyond what’s required for themselves, many broker-dealers have contingency plans in place for their affiliated representatives, covering natural disasters and emergencies of all types.

About 75% of advisors at independent broker-dealers also have their own contingency plans, according to a recent survey by the Aite Group. And many advisors undoubtedly have worked out such plans informally or have made some of the arrangements that such plans entail. Having formal plans contingency and transition plans committed to paper, however, can markedly improve the well-being of any advisor, his/her business and its clients.

So important is contingency planning, in fact, that Securities and Exchange Commission Chairman Mary Jo White said at a recent conference that the SEC may introduce rules in the fall that would require advisors to put a plan place for a major disruption that could disable them from serving their clients. While such rules would apply only to registered investment advisors under the SEC’s jurisdiction, the issue clearly affects all advisors.

A contingency plan involves consideration of two essentials: people and technology, and what would happen in the event of disruptions to either. Of course, once a contingency plan is developed and put in writing, the final document should be discussed with family and office staff, with copies kept in a readily available and well-known place(s) so it can be accessed if and when needed. Also, run a copy by your compliance department and offer a final copy to your broker-dealer.

On the technology front, the best place for an independent advisor to start gathering information and formulating a plan for one’s own business is with the technology and back-office staff at your broker-dealer. Some of the work involved in developing the technology-related aspects of a contingency plan could involve secure storage of customer records off-site, back-up plans in case of power outages or natural disasters, procedures for accessing PINs and other secure codes, and other privacy and security matters.

On the people front, a good place to start contingency planning is with clients. Are all their account records up-to-date? Are beneficiaries on their IRA accounts and insurance policies — whether or not held with you — current? Do you have all their cell phone numbers and email addresses? Who and how would they like you or a team member to call or contact them in case of a business emergency?

Checking in with clients to update this information not only reassures them about your commitment to providing excellent service, but also affords you an opportunity to learn of recent changes in their lives, which may require modifications in their investment positions.

Of course, the central and perhaps most challenging key part of contingency or continuity planning is determining the person or people who would take over for you if you were temporarily or permanently unable to continue working. Here are three suggestions:

  1. Have at least one other member of your team become registered. Even if handling orders is not part of their job function, they should be able to execute orders in an emergency.
  2. Discuss your contingency planning with your broker-dealer and ask them for help in seeking out nearby affiliates with whom you may be able to arrange a reciprocal back-up arrangement.
  3. Discuss contingency planning with other advisors in your network and with non-affiliated advisors in your area and learn what do’s and don’ts they suggest.

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