Should succession planning be regulated?

by Roland Chan
Founder and CEO of FindBob, a provider of transition management platforms for the financial services industry

In the past, regulators haven’t addressed succession planning as an area of mandated compliance. But when succession planning has numerous benefits for agents, clients and the home office such as: continuous client service, protection of the agency’s business and assets, protection for the agent’s family, preservation of the home office profits, and most importantly a secured future of the business that has been built up over a number of years, should they?

With an aging industry - the average age of an advisor today is in their late 50s - succession planning and development have been left up to the individual advisor... so far.  The Department of Labor, under the Obama administration, along with the SEC’s Division of Investment Management proposed mandatory rules regarding the development of succession plans. 

The policy was postponed under the Trump government, however, if resurrected the new rules would require advisors to plan not just for market stress but any other events that could disrupt their business and the services they provide to clients. The North American Securities Administrators Association (NASAA) did adopt a policy model that, while isn’t currently mandatory, would provide guidance to states that may decide to regulate succession planning for advisors.

The fact that regulators are seeing a need for the industry to have a formal and controlled policy regarding succession and continuity should be a loud wake-up call to all players across the globe from the top down because cracks are already appearing in the system. Now is the time to patch these cracks before they become unmanageable chasms leaving clients to fend for themselves or are poached by competing agencies. 

“We do have these orphaned clients out there and they’re not, in my mind, being as well served as they could be with better planning,” agreed Canada’s Advocis’ president and CEO, Greg Pollock. “I think at some point there will be a tipping point and it will become an issue.”

Hesitancy over pushing a policy on making succession planning a regulatory or licensing requirement today lies in the need to include a compliance department that can overly complicate the solution.

“As soon as we get into the specifics with rules-based regulation, you start to dig into the minutiae,” says HUB Financial’s executive vice president of broker development, Tony Bosch. “A lot of times the real objective is lost and we’re left following rules that, in the end, are not that effective. It becomes a complication that takes a lot of cost, energy, manpower, and bureaucracy to match.”

Nancy Allan, executive director with the Independent Financial Brokers of Canada (IFBC), also pointed out that regulators may be challenged to actually regulate aspects of succession planning. For example, she says regulators could require that advisors take out extended reporting errors and omissions insurance that would cover the practice and protect the advisor from liability that might arise after retirement. “The difficulty in mandating that is how does a regulator enforce something after somebody is no longer licensed and under the purview of the regulator?” she asked. “You’re asking a regulator to do something where they won’t have any ability to impose penalties if it’s not done.”

The carrot rather than the stick
More, instead of a prescriptive rules-based approach, she says succession planning is already covered by existing guidelines which discuss the fair treatment of customers – an area that regulators are very much focused on.

Currently, there are at least three such guidelines. In addition to the Canadian Council of Insurance Regulators’ (CCIR’s) guidance document on the Conduct of Insurance Business and Fair Treatment of Customers, Ontario’s Financial Services Commission of Ontario (FSCO – now known as FSRA, the Financial Services Regulatory Authority), and the British Columbia Ministry of Finance have each released separate fair treatment proposals. 

Allan also says regulators on the life insurance side of the business have been very open and supportive of industry-led solutions to the succession planning problem tending to favour the carrot rather than the stick in inciting behavioural change within its distribution.

In this vein, HUB, acting as an industry bellwether, has also started requiring its advisors to create and register a succession plan with the company – a practice that is relatively new among the industry’s managing general agencies.

“We’ve targeted a first group of advisors and we’re asking them to have a plan, at least a basic plan completed and registered with us. We’ve given them a deadline so the solution is there – if something happens we can help implement it for the betterment of everyone involved,” said Bosch.

A similar program rolled out by IFB for its members may be working to an extent too. Allan said when the IFB first began working on the succession planning question back in 2015, it surveyed its membership to find out how many members had a written, formal succession plan. At the time, just under 14% of members had such a plan in place. Today she says that number is over 20%. “We can see that approach is moving the needle and there is some change being affected.”

Who is responsible?
Insurance companies are also reportedly willing to work with distributors to properly transition businesses to new advisors. But we all know that change is slow when requiring individuals to take the effort to plan for the future. Inherently, we are all procrastinators, so stories still exist where clients have been left to fend for themselves – sometimes without knowing they’ve been left without an advisor at all. 

But if a formal policy change by regulators isn’t the answer, what is? Although regulations put the onus for client communications on insurance carrier companies, regulations or guidance which more clearly outline who is responsible and what level of communication they owe to clients could be beneficial.

“Once you make it a formal policy, you have to impose a formal structure. The difficulty with that is it doesn’t account for situations that fall outside of those parameters. There are a lot of different business models within this industry. It would be hard to have a one-size-fits-all solution,” Allan said. “I think a guideline approach, a guidance approach and an educational approach is going to be more effective in the long run.”

Ultimately, the key is to have carriers self-regulate through guidance that clearly outlines to their agents and advisors on what they’re responsible for, what the carrier must take responsibility for, and what level of communication and care is owed to clients before the heavy hand of regulation forces a “one-size-fits-all” solution that isn’t in the best interest of our industry or the clients we serve.