Dedicated Succession Planning Can Thwart Bad Apple Advisors

The genesis of a massive $102 million fraud allegedly committed by a quintet of financial advisors started inconspicuously enough – with the purchase of books of business from retiring investment professionals.

But in the changeover, the alleged crooks ultimately cost at least 637 victims tens of millions of dollars, authorities said.

To be sure, the former brokers Perry Santillo, Christopher Parris, Paul A. LaRocco, John Piccarreto, and Thomas Brenner chose their victims carefully, and even had help via a network of enablers, Securities and Exchange Commission investigators said.

In February 2015, for example, Piccarreto met with an 80-year-old Austin, Texas, investor who suffered from dementia, authorities claim.

The meeting led the aging investor to sink $250,000 into a web of phantom real-estate companies, spun around a “holding” company called First Nationale, which held little except to serve minimal business functions, according to an SEC complaint.

But the sad tale serves as a warning sign for aging advisors who are thinking of selling their practices before heading off into retirement.

Advisors who don’t due their due diligence – even long after they’ve sold their practices and left the worries of running a business behind – may be costing out-of-sight, out-of-mind former clients their financial lives.

“Most advisors don’t have a plan,” said succession planning expert Edward E. Pratesi, managing director at UHY Advisors. “Without a succession plan and with no contingency plan, that’s really critical because they can help uncover fraud.”

Less than a third of advisors have a written succession plan in place, which experts consider "an alarmingly low number, according to DeVoe & Co., which tracks the RIA market.

Pratesi, co-author of “Being in Business is a Funny Thing – Getting Out is Not!” said ignoring any due diligence on a successor is fraught with potential disaster.

The transition from a founding advisor to a successor is a fragile moment in the life of an advisory, he said.

The Test Of Time

Time is the vital ingredient in any succession plan – time spent with the new advisor, time spent with clients, time spent with employees, advisors said.

Only time will give advisors a feel for whether there’s compatibility between a successor to whom a retiring principal is entrusting his or her life’s work.

“I have seen other RIAs buy retiring books where the selling advisor did not have the same investment philosophy as the buying firm,” said Bridget V. Grimes, founder and president of WealthChoice, a San Diego-based RIA specifically focused on helping women.

Grimes, who co-founded the Equita Financial Network with advisor Katie Burke, admits it’s difficult to find a successor.

Too many retiring advisors simply want to sell their business, collect their payout and call it a day, or a life.

Lured by the payout, many advisors are quick to assure clients they are in good hands. But many mom-and-pop investors are relying on that advisor to make the right long-term decisions, Grimes noted.

“Unless it’s a like-minded investment philosophy – and I’ve run into a completely different approach between a retiring advisor and an incoming advisor – I don’t know if the clients end up staying,” Grimes said.

Grimes compared the hunt for a professional soulmate to the dating scene where people join networks of all kinds to seek out compatibility based on common – or perhaps not so common – interests over the course of several years, not weeks or months.

Due diligence should serve as minimum requirement, but beyond that, there’s no secret sauce in a profession where so much depends on relationships.

“Both parties – existing advisor and new advisor – do not have any way to guarantee how the other will behave in the future,” warns Brandon Mackie, an advisor in Kennesaw, Ga.

A Vetting Process

With billions of dollars in client assets expected to turn over as older advisors get ready to hand their businesses off to internal or external successors, experts recommend at the very least checking public databases.

While that may sound elementary for the majority of good advisors, scanning FINRA’s BrokerCheck or digging through ADV forms and other state or federal government repositories might not be as obvious to investors.

In any case, BrokerCheck disclosures don’t seem to have deterred Santillo and his accomplices, who were operating with expired licenses, facing suspension and even disbarred, according to the government’s complaint.

An attorney for the defendants declined to comment on the case.

Other databases include public criminal records, resumes, references and face-to-face interviews. Succession agreements can be structured to include look-back periods and include buy-sell insurance contracts, advisors said.

Succession experts at companies like FP Transitions and other advisor trade groups are well stocked with how-to guides and the due-diligence steps involved in succession planning, but in the end there may be no better vetting process than time to build a bond.

Retiring advisors need a comfort level with successor advisors, and clients need to attain a comfort level with successor advisors, said advisor Dennis R. Nolte, with Sea Coast Wealth Management in Florida.

“It’s especially important for the new people to have a bond with the client base,” Nolte said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]