Reps’ retirement poses risks to clients

With the advisor workforce aging, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) set out new guidance on succession planning in the brokerage sector — which can spark conflicts of interest and expose clients to risk.

In a notice to the industry, FINRA said that the effects of the pandemic, coupled with population trends in the brokerage business, have intensified the need for succession plans, along with succession planning-related education, tools and services.

According to the self-regulatory organization, industry demographics indicate that a growing share of reps are at or near retirement age in the U.S. brokerage business.

Overall, it reported that 16.3% of reps were aged 60 or older, as of the end of 2021. It also noted that 8.2% were age 65 and older, and 3.8% were age 70 and older.

Additionally, the share of reps approaching retirement age is higher at the industry’s small firms.

For instance, reps aged 60 and older made up 20.7% of reps at small firms (defined as fewer than 150 reps) — compared with 15.8% at mid-sized firms (150 to 500 reps), and 18.2% at the large firms.

While succession plans at large- and mid-sized firms can include a plan for selling retiring reps’ books, or reassigning clients within the firm, for small firms it can mean selling the firm outright, the guidance noted.

Among other things, these transitions can potentially expose clients to risk of misconduct when their accounts are being sold or transferred to a new rep.

“Firms should be aware that bad actors may purchase a representative’s book of business to obtain access to customers’ accounts and information for fraudulent schemes,” the guidance said.

These risks are heightened when a rep is leaving the industry due to regulatory action, it said.

Additionally, reps on the verge of retirement may face new conflicts of interest that arise based on their specific succession plan — such as recommending accounts or products that “are more likely to generate a higher valuation for the sale of the business or commission payments in retirement.”

Alongside plans for addressing reps’ retirements, the guidance also noted that some firms are taking steps to address other consequences of aging in their advisors, such as cognitive decline and diminished capacity.

These initiatives include training on diminished capacity and cognitive decline for all staff; adopting a process for escalating concerns about suspected cognitive issues in reps; establishing internal committees to collectively evaluate these issues and take action to address reps’ limitations, while complying with employment laws and privacy requirements.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.