FINRA Prompts Succession Planning for Aging Adviser Industry

The Financial Regulatory Authority (FINRA) this week gave guidance to registered financial representatives on how to properly hand over the keys of their business with the goal of protecting clients from disruption.

The notice comes as the brokerage industry has an increasing number of representatives at or approaching retirement age, according to data collected by FINRA. Though the regulator does not require succession planning, it strongly advocates for it so brokerage clients are not disrupted by expected events, such as retirement, or unexpected events such as death or illness.

“Registered representatives (representatives) often develop close and trusted relationships with their customers,” FINRA said in the Regulatory Notice. “The COVID-19 pandemic and industry demographic trends have spurred greater focus on, and adoption of, succession plans in recent years.”

In the 31-page notice, FINRA laid out the benefits of succession planning, common types of plans, and an overview of FINRA rules and administrative processes. The regulator advised the more than 600,000 brokerages on succession planning strategies including:

• Creating teams of advisers to service customers as opposed to one-to-one relationships
• Hiring developing or junior representatives to take over a book of business
• Designating an official successor to the firm and customers
• Signed contingency plans should a representative unexpectedly not be able to work
• A firm plan for reassigning customers to another representative if needed
• An agreement to transfer or sell a book of business to another firm or representatives at another firm
• An agreement for a firm to merge into or be acquired by another firm

Small Firm Need

The percent of brokers at or near retirement age is higher at smaller firms—between one and 150 representatives—making them in need of succession planning that may involve selling the business outright, FINRA said.

“Particularly for small firms and sole proprietorships, a succession plan may involve the sale of a firm,” FINRA wrote. “While plan terms and complexity vary, succession plans typically address the sale of a book of business or firm assets or the reassignment of a representative’s customer accounts.”

The regulator also advised firms to be aware of ‘bad actors’ who may purchase a book of business to use the customer account information for fraudulent schemes. It cites a court case in which the SEC shut down a $10 million Ponzi Scheme in which the defendants bought up books of business and convinced the newly acquired clients to withdraw their savings and invest with the defendants.

The graying financial adviser industry has been part of the robust acquisition market for registered investment adviser practices, with a trend toward further, relatively smaller acquisitions going forward, according to a Q3 report from investment bank and management consultancy Echelon Partners.

As of the end of 2021, FINRA said that 16.32%of representatives were age 60 or older; 8.20%were age 65 and older; and 3.82%were age 70 and older.

While FINRA does not require succession plans, it does require brokerages have a business continuity plan (BCP). This requires firms to create and maintain procedures related to an emergency or business disruption at least annually.