Everything you need to know about advice practice succession
Advice professionals who are keen to extract maximum value from their financial practices must pay close attention to their succession plans at the earliest stage possible. Alex Cook, CEO at GCI Group, said that choosing the perfect succession model hinged on the answer to three simple questions. He was presenting on the complex topic during the 2020 Financial Planning Institute of Southern Africa (FPI) 2020 Annual Convention. “The succession planning journey is never easy; but if you get things right it can be incredibly rewarding,” said Cook.
What phase is your practice in?
Cook identified three phases that financial planners typically find themselves in, namely growth, retirement and optimisation. The key focuses during the growth phase include advising clients and growing your business’ annual recurring revenue. During the retirement phase your focus shifts to maintaining your lifestyle. You are not as advice-focussed; but want to ensure that you can leverage off your existing client network with confidence that your existing clients are looked after. “The final phase is that of optimisation, where you seek to continue earning while focussing on and advising your ideal clients,” said Cook.
You now have the information needed to answer the following questions in the succession context. First: Are you maximising the return on the time you spend within your business? In other words, is the time you spend on giving advice and prospecting for new clients adequate to offset the countless time-draining administrative activities that your business has to perform. Second: How much would you have to sell your business for, today, to replace a quarter of your revenue on a permanent basis? Third: Are you looking to grow, optimise or retire? And finally: Are you putting plans in place to make sure that your revenue model continues on an indefinite basis?
Accommodating succession planning objectives
Understanding where your practice ‘fits’ on the growth, retirement or optimisation measure is important because this will influence the outcomes you require from your succession planning journey. Financial planners who are in the growth phase will want their succession model to allow for unimpeded growth in annual recurring revenue; free up time to focus on advice-giving rather than administration; and continue building a business that will become an asset for life.
The objectives are slightly different for financial planners who are in the retirement phase, where the succession model should accommodate your current lifestyle and income needs; ensure ongoing advice to your existing client network; and give you some flexibility to continue working and leveraging off your network. And finally, those who find themselves in the optimisation phase, will want to earn more while focusing on advising existing clients; spend less time on non-revenue generation activities; and achieve a sell-once-earn-repeatedly valuation for their life’s work. Cook has some street cred in implementing business succession solutions, having headed-up GCI Group as it partnered with 35 businesses over the years. He admits that three of these transactions ended in tears due to a failure in establishing a ‘perfect match’ from the outset.
Choosing from five transaction models
The presentation considered five business models that could answer the financial planner’s succession dilemma. We discuss each briefly; but recommend that those who require more detailed information take up Cook’s offer of a free e-book, available at https://www.gci.co.za/ebook
Model 1: An independent financial planner approaches another and buys his or her business outright. “The transaction value is most often calculated as a multiple of annual revenue, say two times, and then paid to the seller in four tranches,” said Cook. Some financial planning is indicated to determine whether the transaction price is adequate to meet the seller’s long term income goals; but in practice the price so determined is seldom sufficient to provide income throughout retirement. The pros in this model are that the capital valuation is pre-determined and that the seller makes a full time exit from the business. Cons centre on the limited capacity of the purchasing adviser and the risk that clients receive poor ongoing service.
Model 2: A large corporate acquires a portion of the financial planner’s business at an attractive multiple. This is a fairly common solution that leads to a disconnect between ownership and the control of ongoing revenue streams. “You are responsible for the expenses within the business; but you do not have a say in revenue,” said Cook, who offered a long list of cons that include losing independence and difficulties in selling the remaining interest in the business.
Model 3: A financial planner joins a large firm. “The firm takes care of all your administration and compliance needs and has offices you can work from,” said Cook. “And there are other advisers in the firm who could take over your business at a future date, often with financial assistance from the firm to meet the valuation discussed in Model 1”. Issues with this model include giving up your independence and missing out on the long tail that you have built in your existing client book.
Model 4: A financial planner invites another planner to join his or her business. “There are many problems with this model and we seldom see it work in practice,” said Cook. Although the model gives access to revenue from existing clients, you miss out on the potential of referral business from this base. There is also a risk of being drawn deeper into the day-to-day management of the business due to the incoming adviser’s inability to cope with the workload, among others.
The preferred solution
“None of the existing models are fit for purpose,” said Cook, who proposed a fifth alternative. “We believe a fit for purpose business model is one where you are able to earn from your clients, both existing and new, for the rest of your life, under the protection of a large independent advice house that has a full back office allowing more focused time with clients”. This partnership model allows you to triage your clients to other advisers at your own pace while maintaining your independence and continuing to build a sell-once-earn-repeatedly business valuation.
“As leaders in this profession we need to consider our businesses not in terms of how the revenue is growing; but how our businesses are growing,” concluded Cook. This requires implementing a succession plan that locks in the revenue from your business for life at an optimised capital valuation. You can achieve this by starting with an end in mind; adopting a growth mindset; and finding the right succession partner.
Writer’s thoughts:
The two main motivations for a financial planning business to implement a bullet proof succession model are the long tail nature of revenues and the need to provide sustainable ongoing advice to clients. Are you in broad agreement with the succession models presented in this article? And which would you prefer for your financial advice practice? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
