Plan for succession, or pay the price

It is tempting to think about a financial, investment or tax advisory business as a business for life but the reality is that career change, economic factors, ill-health or regulatory interventions could see you a forced seller of your practice. Having a well-thought succession plan is thus non-negotiable for advice processionals, regardless of their area of specialisation.

Saying goodbye to your advisory practice

Successful succession was up for debate during the latest Morningstar Adviser 2.0 webinar series, aimed at discussing trends outside of the typical financial market and investments realm. “After spending years building a financial advisory practice, it can be hard to think about succession, or planning for a day when you are no longer an integral part of the business that you built and nurtured,” said Arno Olckers, Business Development Manager at Morningstar, introducing the topic. 

The conversation kicked-off with a look at how regulatory change in the Australian financial services sector sent many financial advisers in search of new careers, as they found it impossible to continue in their practices in light of tough minimum education requirements, among other challenges. “The Royal Commission became the proverbial fork-in-the-road that shaped the advice landscape down under,” said Stuart Maré, Investment Specialist at Morningstar Investments Australia. Established in December 2017, the Commission investigated misconduct in the banking and financial services industry in Australia. “This was a government-led initiative, and it took all role players in industry to task, including the regulator … a great deal of legislation and reform followed [leaving] many advisers unable to keep up,” he said. 

The commission and higher learning conundrum

High education hurdles introduced by the Financial Advisor Standards and Ethics Authority (FASEA) combined with the outright banning of commissions built into financial products through the Future of Financial Advice (FOFA) reforms had significant implications for the advice industry, and for advisers operating according to the status quo. Businesses with “multiples that were largely linked to commission” and vertically integrated models had to fall in line with the regulatory shift, or become irrelevant. 

At an individual level, “the Royal Commission meant that a lot of advisers had to step away from their businesses and from the industry,” Maré said. And many advisers ended up exiting their careers a lot earlier than otherwise would have been the case. The Australian experience offers two important lessons for South African  advisers and advice practices. First, succession should not be regarded as a future problem to solve for. And second, successful advice practices must recognise and embrace best practice principles, and continue to raise the bar in this regard.

Local financial advisers are quite cognisant of the dynamic and flexible regulatory environment within which they play their trades. They have persevered through the Financial Advisory and Intermediary Services (FAIS) Act and its Code of Good Conduct, and they have weathered the 2014 Retail Distribution Review (RDR) and its 50-plus proposals, many of which have already been implemented through countless amendments or tweaks to existing laws or standards. The remaining proposals will either be abandoned or introduced through the long-awaited Conduct of Financial Institutions (COFI) Act. 

Advising in a permanent state of readiness

Advice practices should carry out their day-to-day activities in a state of readiness to transfer clients and the business at a moment’s notice. “Your business should always be ready to sell,” said John Campbell, co-founder, Chartered Wealth Solutions, before reflecting on how long it takes between deciding to sell and actually exiting an advice practice. From his perspective, the negotiation of the purchase is important, with the starting point being to take the ‘target’ financial planner through the Chartered Wealth financial planning process to determine if a values alignment exists. “It can take up to three years to negotiate a transaction, and then three to seven years for the acquired financial planner to exit,” Campbell said. “You cannot do this quickly; it is not an overnight thing”. 

So, what can you as a financial adviser or owner of a small advice practice do to ensure that your business is ready for a potential acquirer? Campbell said it was unnerving how little knowledge the principals of many advice practices had of their businesses. The suggestion was for principals to balance how much time they spend working on their businesses with how much time they spend in their businesses. Bottom line, you should be able to answer questions about how many clients you have, the mix of assets across clients and providers, the average age and geographic spread of your clients, the balance of commission and fee income, etc. Another important consideration is to move your clients’ information from paper-based, legacy systems to a digital CRM solutions. 

There is no better way to make your advice practice attractive than to know what a potential suitor is looking for. Campbell, who has successfully acquired and integrated seven advice businesses into Chartered Wealth over the years, said that a culture fit between the acquiring and target business was probably the most important factor. “If your values are aligned in terms of your advice process, it counts as a huge benefit,” he said. The quality of the practice’s book is critical too, with the average age of clients standing out as an oft-overlooked measurement criteria. It is also common for the acquiring firm to consider the target firm’s advice and investment philosophes. 

According to Campbell, there are many advice practices that generate income from investment advice rather than financial planning, with the key ‘tell’ being how the client experiences / views his or her interactions with the practice. Of course, the ‘weighing up’ of factors such as financial versus investment planning or commission versus fee income are unique to each acquiring firm. “We do not really look at a commission book; we do not see much value in a practice that has a commission only life book,” he said. “But fees, and especially ongoing fees, are worth pursuing”. It is also worth doing a deep dive into the mix of products and services the target business offers to determine potential mismatches, and the consequences of same. 

Adviser-client relationships are key

Finally, before snapping up an advice practice you should consider the ratio or spread of adviser-client relationships in the target business. “For example, if you are buying a business from an adviser who has no staff it can be quite a struggle to transition,” Campbell said. This concern can be addressed by ensuring that the adviser in the target business stays on for three- to five-years to transition adviser-client relationships over time. 

If you do your homework, then there should be no reason why your average client retention rate on your acquisition remains high. According to Campbell, it is possible to retain close to 100% of acquired clients. The trick, he concluded, is to ensure the adviser-client relationship post-transaction exceeds the pre-transaction experience. This is easily achieved through a two- or three-year handover period, where clients are serviced by the existing adviser and a senior planner at the acquiring firm. 

Writer’s thoughts:

I suspect that the succession debate would change slightly if attendees were picked from small financial advisory practices rather than acquiring firms… Do you run a small advice practice. And do you that the tips in today’s article will assist you in a successful exit, for whatever reason? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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