Is Your Succession Plan a Fiduciary Breach?

As independent advisors approach retirement, are they legally obligated to put clients' needs before their own, even if it means not being able to reap the full benefits of their life's work?

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

While the wealth management industry has been enjoying incredible growth, one of the fastest-growing segments has been independent RIAs, many of whom are regulated by the SEC and held to a fiduciary standard.

This fiduciary duty means RIAs are legally obligated to act solely in the best interest of their clients. Among other rules, RIAs are bound to a "duty of care"—a responsibility to avoid misleading clients and have a reasonable basis for investment—and a "duty of loyalty" that requires an advisor to avoid conflicts and place the client’s interest above the advisor’s own.

The narrative of unconflicted, fiduciary advice has served RIAs well. Yet as the average age for RIAs has advanced to nearly 60 years old, the question of fiduciary responsibility has become relevant in another sphere: succession planning.

Over the last few years, conversations within the industry have naturally begun to focus on the impending retirement of the founding generation of advisors and the transition of their business.

These RIA firms have also become very valuable businesses that produce relatively stable cash flows for their owners. That makes them an attractive investment for many would-be buyers—large pools of private capital, banks, larger RIAs and private equity-backed consolidators.

The prices for well-run advisory businesses are going up as more buyers, with more capital, chase efficient and successful firms. So what happens when the aging owners of very attractive firms—who are held to a fiduciary legal duty to act solely in their clients’ best interests—consider the options for succession planning?

Should they aim to maximize their life’s work? Provide financial security for their own family? Is there a conflict between doing so and honoring their duty to clients? Most important, if the RIAs choose the options that are best for their own bank account over the options that would truly best serve their clients over the long term, would they be breaching a fiduciary duty of care or loyalty?

Many founders say they would prefer to have an internal succession within the business—but many also say they don’t have successors lined up or ready to take over. If the advisor chooses an internal transition to an advisor who is not prepared to advise clients or run the business, does this choice conflict with a fiduciary duty?

The answers are probably not as simple as yes or no. There are many options for advisory firm successions, all of which tout their benefits to advisors considering a transition.

Most advisors can rationalize whichever option is chosen. In truth, they may be the only ones who really know whether their decisions are in the best interest of their clients.

---by Matt Cooper

Matt Cooper is president of Beacon Pointe Wealth Advisors in Newport Beach, Calif.