As a financial advisor, you insure clients’ assets and ensure their families have financial security if the breadwinner cannot provide. But have you made provision for your FSP and clients if something happens to you?
Succession planning is often forgotten, as nobody wants to think about what will happen if they are no longer around. However, succession planning should be one of the first things to be done when assessing all aspects of business management.
Succession planning is a strategy to pass on leadership roles, most often business ownership, to one or a group of employees. This enables a business to continue operating after its most important people move on to new opportunities, retire or pass away.
Sections 2, 11, and 12(a) of the General Code of Conduct clearly allude to succession planning. They state that clients’ affairs should not be left void and clients should not suffer financial loss if something happens to an FSP. Furthermore, FSPs are required to establish internal processes and procedures so clients are not negatively affected if FSPs fall ill or die.
Practical guidance to develop your succession plan
When initiating succession planning, your business entity should determine your approach. In sole proprietorships, the KI, who is a natural person, is the business. If something happens to the KI, the FSP licence would lapse. Sole proprietors should therefore consider entering into a contract with another FSP to take over the clients if the KI passes away. This will ensure that clients are not negatively affected.
If your business entity is a close corporation or company, the business could continue operating if the sole member or sole shareholder passes away. These FSPs could appoint a second KI on their licence to avoid interruption of business activities if the current KI exits the business. In this way, clients are protected.
There are also other considerations to succession planning. For instance, a succession plan is needed sooner rather than later, as unexpected events can happen. KIs may intend to retire in the medium to long term, but become incapacitated or pass away before then. Being proactive also includes being aware of and developing your personal as well as business goals and objectives.
Think carefully about who would be a suitable and willing successor for the FSP. Successors may not always be obvious, and some potential candidates may not want to become KIs. You may even prefer someone who is outside of your business. Candidates should be aware that you are considering them, as they need to agree with the decision. Candidates who are not already KIs will need training, and current KIs will need to make allowances for the candidates to grow.
Start stress testing your succession plan before it must be actioned. It is never advisable to wait for a crisis to assess if your succession plan will work. By passing on some responsibilities and assistance functions, you can assess the capabilities of a candidate within your FSP. A candidate who is not part of your FSP could be appointed as a KI on your licence. This would integrate them into your business and assist them to understand your business model.
To ensure your employees are aware of your plans, communicate your succession plan. In this way, everyone can work together to grow the business, achieve the same goal and ensure its continued success.
When you have drafted your succession plan, be sure to review it regularly to ensure it stays relevant.
In summary, a few action points:
- Determine the needs of your FSP and FSPs clients in terms of succession.
- Pre-plan your succession approach and include short-, medium and long-term arrangements.
- Start your search for an appropriate successor and reach an appropriate agreement.
- Test your succession plan before you actually need it.
- Clearly document and communicate your succession plan.
- Review and update your succession plan as frequently as required to ensure that it remains effective and can be relied on when needed.
Masthead provides Practice Management guidance for succession planning, as well as Practice Evaluations to determine the true value of FSPs. Speak to your compliance officer for further advice.