June 25, 2012
Financial advisers spend a lot of time creating contingency plans for their clients, but many neglect to prepare for their own worst-case scenario. In 2005 adviser A.J. LaVallie, then 45, thought he was in perfect health until a routine colonoscopy turned up colon cancer. A quickly scheduled operation meant he was unable to work at all for several weeks, and then a year of chemotherapy left him unable to work at full capacity.
But LaVallie, a principal with The Advisors Group of Chicago who is now cancer-free, didn't lose a single client during his illness. His practice was set up in a way that others could easily fill in for him. His staff and four partners helped handle his clients' financial plans, while his portfolio continued to be managed by an outside asset management firm, SEI Investments Co.
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Many advisers are not be so well positioned for a sudden leave. "That's where the majority of people are failing when it comes to succession planning: They're not thinking about illness," said John Anderson, head of practice management solutions for SEI Advisor Network, a division of SEI that provides investment strategies to advisers.
Even if you're in good health, you need a plan to protect your clients, and your business, if you need to go on medical leave unexpectedly.
Morgan Stanley Smith Barney adviser Paul Stanford learned this lesson the hard way. Before going on a health-related leave of absence in March 2010, Stanford's branch manager assured him his clients would be looked after, said his lawyer, Steven Rosenberg, a principal with Hingham, Massachusetts-based South Shore Law.
Stanford, who declined to comment, believed this meant his clients would be returned to him when he got back, Rosenberg said. But when Stanford returned to hisNorwell, Massachusetts, office in February 2011, he found that many of his best clients, who had been spread out between several brokers, thought that he had left the firm.
The clients were hesitant to do any trades with Stanford because they were confused about what was going on. He was making as much $136,000 annually before his leave, but he couldn't make a living when he got back, Rosenberg said. Stanford took his case to a Financial Industry Regulatory Authority arbitration panel, which awarded him $125,000 in a ruling released earlier this month. Stanford had requested damages of more than $900,000. A Morgan Stanley Smith Barney spokesman declined to comment on Stanford's case, but noted the company has a uniform leave of absence policy covering all employees. Rosenberg said Stanford is technically still employed with the firm but is on another leave of absence.
The first step in creating a contingency plan is to find someone you trust to take good care of your clients, but not try to steal them. If you are on a team, that is largely built in. Advisers at large firms who aren't on teams can get a branch manager's help to find a good match. If you're an independent adviser at a small firm, the relationship manager at your broker-dealer or custodian may be able to connect you with an adviser who can watch your book.
Next, decide how you'll share revenue with the adviser minding your clients. If you're just taking a month off and your clients' portfolios are handled by outside asset managers, you may be able to simply say thank you with a nice bottle of wine.
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For those with mostly a commission-based business and a medical leave of three to six months, expect to give up the majority of the revenue, perhaps 60 percent, suggests Ed Friedman, practice management coach and senior partner at New York-based Friedman Consulting Group. But Tom Lewis, an employment lawyer with Stark & Stark in Lawrenceville, New Jersey, said unless a client's account is inactive, the adviser temporarily watching it deserves nearly all the revenue as he takes on legal risks with each trade he makes.
Once you hammer out a deal, make sure it's in writing. An email chain will likely suffice; a formal contract is even better. Your employer or broker-dealer can probably give you a template for the contract or tips on what clauses to include. And no matter how well you know the other person, it can't hurt to have a lawyer look the contract over, said SEI's Anderson. "Agreements get misconstrued," he said.
You don't have to give clients intimate details about your leave, but provide enough information so there's no confusion about how long you expect to be away. If you're at a large firm, consider asking the branch manager to send clients a letter explaining your leave and introducing the person who will be temporarily handling their accounts. This can reassure clients that the firm is OK with your absence, said Marc Dobin, a securities lawyer with Jupiter, Florida-based Dobin Law.
"Nobody wants to think about the worst, but the smarter people are the ones who plan for it," said Friedman, the practice management coach.