Succession Planning: Considerations for Smaller Firms


The concept of succession planning[1] is familiar territory for many financial advisors. While it is common for financial industry professionals to counsel clients about how to plan ahead for their future, often times financial advisors fail to plan for their own needs. In fact, a 2015 benchmarking study by Fidelity revealed that, while more than 33% of investment firm owners were planning to leave the business in the next 10 years, approximately 40% of those firms had succession plans in place.[2]  As financial advisors consider how to ensure their businesses will remain successful and be able to adapt to events that may arise (including, among other things, retirement), the need to plan for the future becomes paramount, and the development of a thoughtful and comprehensive succession plan should take on a position of priority.

This month’s Legal Risk Management Tip provides an overview of select succession planning considerations, with a particular focus on considerations for smaller firm succession planning needs. Next month we will focus on succession planning for those advisers heading into retirement.

  1. Overview of Regulatory Expectations Regarding Succession Planning

    Historically, rule makers have made efforts to have succession plans be a mandatory component of an advisory firm’s compliance program. The North American Securities Administrators Association (“NASAA”) issued a model rule in 2015 on this subject.[3]  While the Securities and Exchange Commission proposed Rule 206(4)-4 to the Investment Advisers Act of 1940 in 2016, the rule was not enacted. Instead, today the staff frequently comments in its examination of smaller advisers that owners should take steps to address succession planning in the firm’s policies and procedures in accordance with Rule 206 (4)-7, particularly in the event of a leave of absence. With this in mind, the following are considerations for the formation of that policy.

  2. Succession; Short-Term Planning Considerations
    Each advisor’s succession plan should be customized and reflective of the details relating to the business of the advisor. For smaller firms, this means identifying professionals who can assist with portfolio management, trading client servicing and administration in the event that the owner(s) or key members of the senior management team, are unavailable.

    Considerations should be made for short, medium, and long-term absences. Start by defining the terms and what type of event would “trigger” the succession plan. Below are some key points to consider.

    1. Temporary Absences

      Many firms define a “Temporary Absence” as one where a key individual is gone for a period of time lasting from one to four weeks,[4] such as when on vacation. For client servicing, it is imperative to cross train personnel, develop Standard Operating Procedures to instruct firm operations during a Temporary Absence, and have client communications strategies in place. 

    2. Short-Term Absences

      Typically, a “Short-Term Absence” entails an absence of 30 days or more, after which it is expected that an advisor will return to the firm once the events precipitating the absence are resolved.  It can also involve an absence that arises unexpectedly (instead of a planned leave, such as a sabbatical) or that will last for a specific duration – e.g. between 30 and 90 days or less. Generally, such a Short-Term Absence would trigger a succession plan.

    3. Long Term Absences

      Absences lasting more than 90 days are often considered to be “Long Term Absences.”  As long as an adviser will return, a succession plan can be drafted to address the needs of a business for this extended period of time.  Permanent absences, most commonly due to either retirement or death of an adviser, would be included in this category.

  3. Temporary Staffing Plans
    If the succession plan is triggered, the adviser must determine what specific steps to take in order allow business to continue in an uninterrupted fashion.  For senior management, relevant items to consider when faced with an absence include, among others:
    1. Successor:[5] Who will take over for the absent professional(s) during the Temporary or Short-Term Absence period?  Many advisers have a staff member or team that can fill a role during an absence, while others will rely on third parties to become active in this type of situation.     
    2. Successor Compensation: If a professional (“Successor”) assumes the responsibilities of the absent individual, particularly for a longer term, compensation should be considered.  This is particularly true when relying upon a third-party Successor.
    3. Communication of Temporary Plan to Clients: If there is an absence and a Successor becomes active, consider what type of communication will be sent to advisory clients?  In addition, details should be timely delivered to employees and service providers as appropriate.
    4. Update Policies and Procedures Manual: Under Rule 206 (4) -7 (often called the “Compliance Rule”), advisory firms are required to have compliance policies and procedures (“P&Ps”), adequately designed to help them meet their regulatory obligations. Firms should be certain that their P&Ps are updated to include any written succession planning steps at the time a succession plan is created. In addition, the P&Ps should be dynamic documents that are continually assessed and refined.  Regulators will expect P&Ps to be reviewed and revised periodically so that they reflect accurately the details of an adviser’s current succession plan.


Financial advisors work tirelessly servicing their clients and their long-term needs. Now is the time, particularly if you have not done so, to take a step back and consider what would happen if a senior management member was unexpectedly absent for 3-months? Who would help? Do they know what to do and have they been trained?

JLG helps firms to address these succession plan needs. For more information, please contact us.

JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters.

This communication is not intended for transmission to, or receipt by, any unauthorized persons. Inadvertent disclosure of the contents of this article to unintended recipients is not intended. The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. (“JLG”) and in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG.

For more specific information or recent industry developments or particular situations, you should seek legal opinion or counsel.

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[1] For a foundational article about succession planning, see Succession Planning 101: FAQs to Consider, available at:

[2] See

[3] See, e.g., NASAA Model Rule on Business Continuity and Succession Planning, which requires investment advisers to adopt a “Business Continuity and Succession Plan” for their RIA practice,….pdf.

[4] Succession plans should be tailored to each advisor’s situation.  The time periods discussed are intended to be examples of common plan terms.

[5] The determination of an appropriate Successor is clearly a critical part of any Succession Plan and outside the scope of this article.

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