Financial planners – pay as much attention to yourself as to your clients

Recent research by the Institute of Practice Management¹ found that 58% of financial planners in South Africa do not have any plans to retire.

This despite the fact that the average age of financial planners in South Africa ranges from 48 to 54, depending on whose research you are looking at. If such a significant percentage of South African financial advisers do not plan to retire, then they obviously do not have a succession plan in place.

Michael Gerber⁽²⁾, the author of a book entitled “The E-Myth”, which explores the challenges that entrepreneurs face in managing and exiting their businesses, makes the statement that: “There are three things that can happen to your business, it dies, you die or you sell it”. This may seem an extreme perspective, but traditionally many South African financial planning businesses have “died” when their owner has died, with the effect that the clients are either passed on to a new adviser, by arrangement, or they have to find a new adviser.

If succession planning has been bothering you as an independent financial planner, but you have not given any serious attention to it, here are three options with different outcomes to consider:

Often a succession plan for a financial planner will involve either passing the business on to a family member, friend or an existing staff member, with the agreement that a certain percentage of the business’ income or profit will be paid out to the seller until both they and their spouse (if relevant) have died.

A second form of succession would be where an independent adviser will sell his or her clients to another adviser, usually for a multiple of the revenue of the revenue generated by those clients. This multiple is usually in the range of 1 to 2 times annual revenue. This sort of deal would normally exclude the transfer of staff, systems or other fixed assets. It is also likely to include a clawback-clause, which means that the revenue generated by any clients who leave within a specified period of time will be reimbursed to the purchaser.

A third form of succession is to sell the business for an agreed price to an external or internal buyer. Unlike the book sale option, the buyer would be buying the business as a going concern with the plan either to continue running the business in the same or similar fashion as the seller, or to integrate the business into another existing business.

The challenge here is to consider if there is any real difference between options two and three. Put another way, what value can a financial planning business have beyond simply being a book of client assets?

The heart of the answer to this question is the extent to which clients are attached to the business. If clients are simply attached to one individual in a business (which is often the case), then they are very likely to move on when that individual sells, retires or dies. However, if clients are attached to the business, it could be argued that the business has real value of its own.

What would make clients attach to a business rather than an individual? The simple answer is that the client will have had a number of positive experiences of dealing with a business that relies on process rather than any particular individual. In so doing the client will have built up trust in the business and adopted a belief that it is able to continue to deliver on his or her needs, irrespective of the individuals in the business.

In order to achieve this, a business is likely to have a few key characteristics:

• It is likely to have a recognisable brand, which has positive associations for the client.

• The business will have a sound advice process, which is delivered consistently to all clients, no matter who is giving the advice. Thus the quality of advice is not dependant on the skill or insight of one particular individual. It is important to note that even if there is only one financial planner in the business, it is still possible for them to have a consistent and sound advice process from which clients draw reassurance. If the business is sold but clients are reassured that the method for giving advice will remain consistent, it is far more likely that clients will remain attached to the business.

• The business will implement its advice in a consistent manner for all clients.

• Clients will feel like they belong to a client community that is benefiting from the service of the successful business. There is always comfort in numbers.

With all these characteristics present, it is very likely that the client will have attached themselves to the business rather than an individual. The business now has value that is vested in the relationships with clients, rather than simply a book of assets.

The infrastructure that supports the delivery of services to those clients will also add or detract value from the business. Brand, staff, business processes, systems, advice processes and client relationships are all factors that come into play for valuation purposes. International experience suggests that businesses that have these qualities have been selling on multiples of 7 times earnings and upwards⁽³⁾.

It is critical that all financial advisory professionals take steps to ensure that clients will be looked after once they retire or die. By doing this they don’t only add value to their clients, but they are able to build a business that has serious stand-alone value, which ultimately has the potential to be of huge benefit to themselves. The saying goes that the “feet of a cobbler’s child are never clod”, which is a useful reminder that succession planning is one area where financial professionals would be well-advised to pay as much attention to themselves as they do to their clients.

(1) Johann Maree, The Institute of Practice Management, Masters Research, 2007
(2) Michael E Gerber, The E-myth – why most businesses don’t work and what to do about it, Harper Business, 1986.
(3) Kevin Bailey, “A business view, not a professional practice perspective”, Presentation to Xchange Solutions, Cape Town, 7 May 2008