December 13, 2011

RIA Key Person Risk: What are the options?


Years back, when I was on the management team of an institutional asset management firm, our founder used to call it the "truck" question (as in "What would happen if he got hit by one.) My colleagues and I would respond with guarded laughter and move on to a more comfortable subject.*

No, it's not a subject any of us want to dwell on, but the unexpected loss of a key member of your advisory staff could very likely impact your ability to fulfill the fiduciary duty owed to your clients. With some planning, RIA's can easily mitigate this risk by adopting any number of operational or legal options.  Operationally, advisors can start by reducing their firm's reliance on any one individual.  Some ideas on how to do this include:
  • Establishing and documenting defined roles and responsibilities;
  • Cross-training; and
  • Knowledge sharing (so more than one person is familiar with the firm’s investment process and client relationships).
Easier said than done, however these practices will ensure process continuity during unexpected absences. They also provide added flexibility around planned absences, like vacations!

Technology plays a central role here.  The disciplined use of a CRM and a document management system will ensure that your client information is not only safe, but also centrally-stored and easily accessible.  Likewise, an internal website may be used to store your firm’s operations manual, which documents all critical processes and procedures.  In the absence of a formal operations manual, you can post a set of documents that detail your firm's investment process, work flows and operational procedures.

In addition to these operational efforts, RIAs may also consider establishing a legal agreement that governs the firm in the event of the death or incapacitation of a key person or owner. Single-owner firms can establish a “continuity agreement.” A continuity agreement is a legal contract that appoints an “alternate” registered investment adviser to assume client responsibilities in the event of the death or incapacity of an individual.  If this were to occur, the “alternate” adviser would be responsible for offering to assume their advisory role (clients reserve the right to decline, of course.) The extent of the alternate adviser’s responsibilities can vary.  Their role may be limited to interim oversight (to give clients the opportunity to seek a new advisor) or the alternate RIA may be charged with overseeing the sale of the business (including the possibility of acquiring the business themselves.)

RIAs with multiple owners may opt to establish a “buy-sell agreement.”  Buy-sell agreements establish guidelines for an orderly internal sale of the advisory firm to the other owners.  Typically these owners are employees of the firm and should be familiar with the firm’s clients and investment process.

After taking steps to ensure business continuity, advisors should include these items in their business continuity plan and quarterly compliance risk matrices. In fact, I suggest that advisors include the topic of operational controls and continuity in their presentation materials. Just because clients don't ask the question (and who wants to ask the "truck" question?) doesn't mean that they haven't thought about it.

*As an aside, my dear friend and founder of that firm did not get hit by a truck, but did implement a successful management transition and officially retired a few weeks ago.

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