Ensure client privacy when planning for succession

This article appears in the November 2022 issue of Advisor’s Edge magazine — our second last print issue. If you’re a print-only subscriber, learn more about our digital transition and how to continue to receive all the best news and features on Advisor.ca.

The quandary

You’re five years from retirement and plan to sell your practice, so you want to position your business in the best possible light. Sharing details about your book of high-net-worth clients is an important way to do this, but you wonder about client privacy. How should you prepare to ensure that private client information stays private as you get a business valuation and share book details with prospective buyers?

The experts

Roland Chan, founder and CEO of FindBob in Richmond Hill, Ont.

Preliminary sharing of information about your book can focus on non- identifying details, like client demographics and product mix. Client data isn’t shared until you have a sale agreement.

Leading up to a sale agreement, ensure discussions are confidential by drawing up a mutual non-disclosure agreement (NDA) between you and the prospective buyer. That document generally includes clauses about confidential information and non-solicitation, and should be reviewed by legal counsel.

If you work with an intermediary such as a business broker, an NDA can be executed blindly: the buyer would execute the agreement first, giving the seller an opportunity to abort the process once they learn the buyer’s identity.

Before you create an NDA, conduct preliminary due diligence on prospective buyers to assess if they meet your non-negotiable objectives, such as serving clients in a certain way, having specific designations, keeping your staff on the payroll, and transaction specifics.

Prioritizing your objectives increases the chances of a successful sale and helps protect client information [because you’re able to avoid sharing your book with poor buyer candidates].

When the buyer performs their due diligence, they may want to interview some of your clients. You would need client consent for that to happen.

If you work with a chartered business valuator (CBV), client confidentiality should be upheld because CBVs are bound by an ethics code.

Rod Burylo, industry consultant, manager of investment fund manager and exempt market dealer services with Axcess Capital Advisors in Calgary

Advisors have an obligation to plan for succession (see “Get serious about succession planning”), and industry guidance can help inform privacy considerations during this planning.

For example, FP Canada conduct rules say financial planners can’t disclose personal or confidential information, including a client’s name, without the client’s written and informed consent. Principle 6 of the organization’s ethics code — confidentiality — says client information must be secured, protected and maintained in a manner that allows access only to those who are authorized. What would it look like to authorize someone to review your book of business? Create a succession plan with such standards in mind.

Get serious about succession planning

Advisors and firms have a regulatory obligation to plan for business continuity. Industry consultant Rod Burylo says succession planning should be part of that.

Because succession could arise unexpectedly with an advisor’s illness or death, affecting client service, it’s part of business continuity and therefore should be addressed in firms’ policies and procedures, he said.

Burylo cited FP Canada’s standards of professional responsibility, specifically the ethical principles of duty of loyalty (placing clients’ interests first) and professionalism (conduct that inspires confidence and respect from clients). Financial planners are also to inform clients of material changes that could affect the client-planner relationship or services. Severe illness is arguably such a change, Burylo said.

FP Canada also notes in its standards that, based on legal precedent, a fiduciary duty could arise for financial advisors from factors such as client vulnerability and reliance on the advisor. Those factors suggest advisors may have a duty to plan for succession, Burylo said.

The FP Canada standards raise additional considerations that may be applied to succession planning. The conduct rules say a client should receive timely written notice of the professional’s intent to no longer act for the client, and the withdrawal of services shouldn’t prejudice the client.

“If you’re going to start implementing a succession plan, you need to inform the clients that you’re doing that,” Burylo said.

Successor competence (competence is Principle 4 of the ethics code) should also be considered. Competence is further supported in the conduct rules (a third-party referral must have appropriate qualifications) and fitness standards, Burylo said. As you consider prospective buyers, “look for someone who’s at least the same level as you or better,” he said.

To contribute your own ethical dilemmas or conduct quandaries, please email Michelle Schriver.