Poor succession plans expose advice firms to crisis events: Report

Most financial advice practices are ill-prepared to manage the sudden death or permanent disablement of a principal, according to new research, underscoring widespread gaps in succession and contingency planning.

Business Health's newly released What If...? report reveals 67% of principals do not have a documented succession plan that states how the business should run in the event of a sudden death or permanent disablement.

Only a minority have undertaken comprehensive, regularly reviewed plans covering all contingencies.

"While it is important to plan for contingencies such as retirement and resignation, unexpected death should be regarded as the primary planning priority. In the absence of a clear plan, the consequences can be severe, potentially resulting in significant disruption for clients and considerable distress for family members, as the value of the business may be materially diminished," the report read.

Interestingly, preparedness appears to improve with scale and revenue. Advice firms generating between $2 million and $3 million in annual revenue were more likely to have formal succession arrangements in place.

Single-owner firms are particularly exposed, often combining the highest level of key-person risk with the lowest levels of preparedness.

At the same time, 41% of practices rely on a single adviser, amplifying continuity risk for clients.

Self-licensed principals face additional challenges, including uncertainty over who can legally service clients. Externally licensed practices, on the other hand, can provide support but this depends on clearly defined agreements stating so.

The report overall found a consistent disconnect: advisers who guide clients on risk management are often failing to apply the same principles to their own businesses.

"The business often represents a significant financial asset, and without a formal plan in place, this value is exposed to substantial risk. The consequences of inadequate preparation can therefore be considerable, both financially and emotionally," Business Health said.

The findings should also ring "warning bells" for those that have not a conducted formal external valuation of the practice. Some 56% of practices surveyed have never had one.

"Firstly, a formal external valuation ensures there is not an unrealistic expectation as to the value of the business. It can also identify what areas of the business need to be worked on to maximise its value. Getting an independent valuation is a very positive move," Business Health said.