Succession lessons from financial practice experts
The cost and complexity of compliance and managing both client and ownership succession are among the significant challenges facing South African financial, risk and wealth advice practices, according to a trio of experts assembled for an informal panel debate recently.
Real-life learnings
The discussion, hosted by GrowthHouse, explored various aspects of the all-important succession transaction, based on real-life experiences. Kevin Hinton, founder of The Collaborative Exchange, moderated the panel just moments after presenting a brief overview of the global and South African investment and wealth management merger and acquisition (M&A) environments, reported here. His opening request to the assembled panellists was for them to reflect on the main challenges facing advice practices presently.
Mark Jurgens, a director at Jurgens Group, singled out the complexity and cost of compliance and lamented the growing compliance burden following South Africa’s grey listing by the global Financial Action Task Force (FATF). “Completing certain transactions can be very tedious,” he said, before adding that advisers often met ‘pushback’ from clients as they sought to comply with additional FICA requirements. Cyber security was second on his ‘challenges’ list due to the growing number of business email compromise and phishing attacks. His appeal to the advisers present was to encourage their clients to exercise extreme caution before making any payment from your business or personal bank accounts.
Hinton pressed the panel on the succession challenge, hinting that many advice professionals leave their succession planning too late. Those who begin planning at age 60 or later risk being undone by the disconnect between a sensible succession plan and their retirement funding needs. “Most financial advisers see their business as part of their retirement plan; and they expect to extract assets and a value out of the business at a later stage,” he said. For a successful succession, both the timing of the transaction and the handover of control in the practice have to be managed.
Managing succession within the business
“When we talk about succession, we generally talk about our own succession; the challenge that we face extends to managing client succession within the businesses,” said Ian Martens, owner of Futurity Wealth Management. He pointed out that advisers and advice practices had to think about retaining clients and client assets through changes like death, emigration and intergenerational wealth transfers. The takeout phrase here was, ‘succession involves the business and your clients’.
Careful, timely succession planning gives business owners more choice in deal type and choice of future partner. The moderator asked Quinton Ralph CFP®, MD and Founder at Resolute Wealth Management, about the various approaches he had fielded over time. Ralph, who owns 95% of his practice, said it was very difficult to let go. From his perspective, one of the biggest obstacles to concluding a sale (or partial sale) are the inevitable acquirer-side demands to move assets onto their platforms. “We are very proud of the results in our [discretionary funds], and our clients have seen the ultimate benefit with great returns,” he said.
The timing has to be right regardless of the cultural fit. “Most acquirers want to own 20% at a certain date, then another 10%, and finally phase you out of your own business,” Ralph said. “You might get to age 60 or 65 and realise you are not ready to exit fully; but you are contracted to go”. He offered the main reasons for delaying the sale as timing (he is still in his early 50s); the desire to hold on to the impressive Cat II book built up over the years; and the immense growth potential in the practice. A future deal is possible provided the partner offers a good cultural fit, guarantees independence, and does not interfere in the business.
Independence: the misery of choice?
“In the ‘whole of market’ and ‘misery of choice’ contexts, is independence not overrated relative to having a larger balance sheet associated with your business?” asked Hinton, playing devil’s advocate. Jurgens stepped up to the mic, saying that high-net-worth (HNW) clients valued diversification. “A lot of our HNW clients get offshore exposure through five or more companies; the fact we can achieve that through total independence has helped us with the growth trajectory of our business,” he said. He then shared an example of buying a ‘tied’ book of business, saying that the clients were “delighted” with the myriad new investment possibilities post-transaction.
“Independence is best for clients; at the end of the day you want best advice, best product, best performance and lowest fees,” Ralph said, adding that the financial planner’s raison d'être was to ensure optimal financial outcomes for clients. He noted that true independence was under attack, and that many succession plans involved previously independent practices being swallowed up by large corporates. The fear is that in the absence of genuine concern over independence, practice owners will gravitate to whichever partner offers the most value. This is something that Warren Ingram of Galileo Capital has written about under the theme: ‘the death of independent advice’.
Going pear-shaped, overnight
Martens then shared some details around an acquisition that had gone horribly wrong. He had teamed up with Jurgens to purchase a business that boasted an annuity income of R3.6 million split 50:50 locally and offshore. “The business had a multiple of 3.3 times which meant the purchase price was just on R12 million,” he said. “It sounded like an unbelievable deal”. But things soon went pear-shaped due to the unexpected strengthening of the rand from R12,00 to the US dollar to R6,00. The result was that the offshore portion of free revenue halved overnight, leaving a mere R600 000,00 in first-year earnings for the R12 million ‘sticker price’.
“You cannot always blame the person that brought you the deal; you have got to look at yourself in terms of what due diligence you did,” Martens said. There was no way to walk away from the deal, so Martens undertook to make a go of the business and build ongoing relationships with the clients, while Jurgens made an amicable exit. The lesson, it seems, is that trust, while important, can only go so far. You need to interrogate the expert advice you receive, and make sure to consider the ‘nuts and bolts’ of the business you are acquiring. And the same caution applies when you sell all (or part of) your practice.
Asset managers on the hunt for distribution
In closing, Hinton offered that the DNA of an asset manager and a financial or wealth adviser were not overly compatible. He said that for such transactions to succeed, the acquiring asset manager had to understand the culture of the advice practice they were targeting. Finally, he concluded that the industry was at an inflection point that would see large asset managers become more acquisitive, scooping up distribution in an attempt to bolster dwindling investment flows.
Writer’s thoughts:
There comes a point when the founder of business has to step aside for someone else to take the reins. How are you preparing your advice practice for a successful succession, and what factors are most important to you in choosing a successor or partner? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
