We spend our working day assisting clients with their succession planning. It is our job to ensure that our clients and their loved ones are able to survive if they are no longer able to work or pass away.

Have you as a financial advisor given any thought to your own estate planning? Specifically to what you intend to do with your business if anything happens to you.

Compliance issues to consider

The Financial Advisory and Intermediary Services Act (“FAIS”) states that an FSP’s licence lapses if the licensee, being a natural person, becomes incapable of carrying on any business due to physical or mental disease or injury; is finally sequestrated, or dies. In this scenario, one would have to apply to the Financial Services Board to have a new key individual appointed. The business would not be able to perform any regulated activities if there is no approved key individual. This includes servicing clients, writing new business and receiving commission.

Many business owners are of the opinion that their dependants can sell the business if something happens to them. However, in reality, this is very difficult. Dependents who are not in the industry are not able to determine the fair value of the business. Who do they approach to buy the book? Competing advisors tend to poach clients when they hear about a death or ailment of an advisor. If your clients are aware you have a plan in place, they will not be enticed to move their business.

Sections 11 and 12 of the FAIS General Code of Conduct refer to the importance of having specific measures in place to ensure business continuity. The FAIS Act further states that all Financial Service Providers (“FSP”) must have a Business Continuity Plan as part of the business’ Risk Management Plan. Failure to do so would mean the FSP is in breach of the Act and could lead to their licence being lapsed.

Benefits of a Succession Plan

Apart from the legal obligation on FSPs, there are also benefits to having a Business Continuity or Succession Plan in place, such as increased retention of clients, as clients are secure in the fact that if something happens to you they will still be looked after. It also increases the chance of your successor retaining the clients. The more clients the successor can retain, the higher the selling value of your book will be. This means your business value automatically increases by having a Business Continuity Plan in place.

Without a Plan, the business could lose or have commissions suspended. The risk to revenue is tied directly to the business license, and varies, depending on the type of legal entity of the business and the number of registered key individuals on the FSP license.

In a sole proprietorship, the sole proprietor is the license. This means that if the sole proprietor passes away or is unable to perform his/her duties in terms of the FAIS Act, the license will lapse and the business will cease to exist. The license cannot be transferred to another person. However, the sole proprietor can leave his client book to another FSP. In this scenario, the client has the right to choose if they would like to move the new FSP. A broker note would have to be signed by the client, consenting to move to the new FSP.

In a close corporation, the business will continue to exist if the key individual has passed away or is no longer a part of the business. However, the FSP will need to appoint a new key individual to perform any regulated function in terms of FAIS. Where the close corporation has more than one key individual, the business will continue as normal and does not need to appoint a new key individual. Companies are treated in the same way as Close Corporations.

In a partnership, if a partner passes away, the partnership would dissolve and the license would lapse. All commission on the license will then cease to be paid and no new business can be written in the name of the partnership.

Don’t delay, start your plan today

Considering the above, not only does having a Business Continuity Plan in place protect your loved ones and clients, it also increases your business’ value. Speak to us if you need assistance with your Business Continuity Plan.