INDIANAPOLIS-The husband and wife team had lots of experience. They had worked at large mutual fund shops, then struck out on their own.

She handled the client service role for their advisory firm. He was the portfolio manager, chief compliance officer, the marketer.

They got to $20 million in assets, mostly from friends and family.

Then, he died.

"She was going through a lot of grief," said John Lively, a principal with the 1940 Act Law Group, at the Huntington Client Services Forum here. "But the grief had to be postponed."

Instantaneously, in addition to handling her despair, she had to run the firm.

"Everything you could possibly think of that affects your firm, she had to deal with, almost in an instant," he said.

Including reaching out to clients.

Friends and family understood. But assets that didn't fit into that category, they lost. Immediately.

She had to explain what her plan was. But "there was not much of a plan," Lively said.

Welcome to the difficulties-and dearth-of succession planning at small advisory firms that make up much of the sales force of mutual funds.

Here are the discouraging statistics.

In 2010, a survey by TD Ameritrade Institutional of 500 registered investment advisors found that 57% did not have a formal succession plan and 88% had not gotten a professional valuation of the business they ran. This, even though their average age was more than 50.

A year later, a survey of 502 advisors found that 62% of advisors had a succession plan in place or were developing one. That was a gain of 19%. The average age of respondents was 54.

Fidelity Investments was not so fortunate. In its 2011 benchmarking study, 75% of investment advisors who participated in its survey either didn't have succession plans for their businesses or had plans that were not ready to be implemented.

That means the business can die suddenly, if no successor is in place.

"Turning the reins over to the next generation is critical to the long term viability of a firm," said George Tamer, director, strategic relationships, TD Ameritrade Institutional, after the release of its 2011 survey.

"A firm with an aging client base may suffer from a lower valuation and should consider attracting younger advisors and younger investors to establish a lasting legacy." Worst case: If the advisors who serve you don't have a plan, a death of a principal could in fact spell the death of a firm.

Take the case of the husband and wife team in Colorado. The 1940 Law Act Group almost immediately had to stave off the shutdown of the widow's livelihood, the firm.

She wasn't appropriately licensed. Her husband was the licensee, he was the principal. So, the state wanted to shut down her business.

"These state regulators are crazy people, I think," said Lively. "It's the only way to describe it."

Her answer, in the short term, was to sidestep the question-by not charging fees. She could give advice. But not make money from it. Until the regulatory fog was cleared.

Then, there were the investment contracts. The widow's contracts did not have what is termed "negative consent." That is to say, a customer would have to explicitly state that it did not want its assets to transfer to the supervision of the new principal, in the event of death or other cause of a transition of the principal.

Instead, she had to go through the process of achieving "positive consent": Asking each customer for its consent.

Then, still grieving, she would have to face "tough business issues" in a "short order of time" such as whether to bring in a new principal or relying on a particular person or organization to act as a sub-advisor.

"It takes a little while to find the right person to do what you want to do," said Lively. Particularly if "you're the type of advisory firm that has something neat about what you sell or the type of investment advice you provide" you want to make sure it's someone who has the "right values."

Then there are the operational issues. In this case, all of her accounts were handled at TD Ameritrade. "We had to get authorization" for the new partner to handle the accounts, Lively said. "These things don't happen with the click of a switch."

In sum, succession planning means you need to think about every aspect of the business.

But the biggest single question an operator of a firm has to answer is: Is he or she running a business that should last in perpetuity or one that is primarily run to support a lifestyle?, said Mark Schikowski, partner, Cohen Fund Audit Services.

Entrepreneurs, he noted, are driven by the sense that "it's my baby" and often don't have much conception of how the business will work out, in the end.

"They lose sight of the fact that without some way of perpetuating this thing, it dies with me," Schikowski said.

There's nothing explicit in the Investment Advisers Act of 1940 or the Investment Company Act of 1940 that says "thou shalt have a succession plan," Lively said.

If your board says you must have one, then you have to have one, he notes.

However, a footnote in a release adopting Rule 206(4)-7 under the Investment Advisers Act and a corollary for the Investment Company Act, according to Lively, says that advisers must "take steps to protect the client's interest from being placed at risk as a result of the advisor's inability to provide advisory services after for example a natural disaster or in the case of some smaller firms, the death of the owner or key personnel."

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