Succession planning - what financial advisers need to consider

Succession planning: what financial advisers need to consider

Retirement – particularly forced retirement – of financial advisers poses problems not only for advisers and their practices, but also for their clients, says Guy Holwill, the chief executive of Fairbairn Consult.

Young advisers typically start working with people in a similar age bracket, and they form friendships over the next 20, 30 or 35 years. When an adviser is forced into retirement at 60 or 65, they are ripped away from these clients, most of whom are about to retire and need to make what is arguably the biggest financial decisions of their lives.

“Very few advisers plan to exit suddenly. However, there does come a time when they may need to slow down or rearrange how they work. Failing to plan for this change will make the process complicated, difficult and messy.”

While the Financial Advisory and Intermediary Services Act states that continuity plans must be in place, there is a misconception that succession planning is a long, painful process.

When it comes to succession planning, Holwill says a distinction should be made between continuity planning and retirement planning.

Continuity plan

All advisers need a continuity, or “drop dead”, plan, even if you are only 25 or 30 years old. It is important to think about what would happen if you were to die or be incapacitated prematurely, says Holwill.

The process needs to be clearly agreed upon and documented to prevent complications.

The key considerations include:

  • Who will take over the practice?
  • Does your successor have the capacity to add your client base to theirs?
  • Does your successor have a similar advice philosophy? If not, clients will have a hard time transitioning.
  • Does your successor have the correct accreditations and contracts with suppliers?
  • Will your successor buy your practice, and if so, have you defined who the proceeds will be paid to, and considered the tax implications?
  • Have you agreed on how the practice will be valued so that when you are no longer here, the process will be fair for your beneficiaries?

He adds that it’s important that you communicate with your staff and clients.

“Staff need to know whether they will still have a job, and clients must understand how it will affect their relationship with the practice.”

Retirement plan

Also called planned succession, this is where you start thinking about the future and what will happen to your practice when you retire, says Holwill.

The first thing to consider is what retirement means to you. For some, is it walking away and going fishing, and for others, it means a gradual process of working fewer and fewer hours a week.

The next thing is to identify a successor. In many instances, successors spend many years working in the practice.

Holwill says the key considerations with this type of plan include the legacy you want to leave, when you intend retiring, and whether you will revert to a client relationship role.

If you plan to remain in the business in some capacity, have you agreed on how you will be paid?

The most important consideration is how many years you have set aside for the transition of client relationships to your successor. Best practice is about four years, but there are instances where a second-in-charge, or 2IC, works with the adviser for a decade or more, says Holwill.

How to get started

Holwill suggests you get the ball rolling by setting aside a few hours and writing down what you would like to see in your succession plan. As you flesh out the finer details, it will take more time, but this is a valuable investment. The next step is to communicate the plan with staff and clients.

Holwill advises that you start having your practice valued every five years from about the age of 40.

After each valuation, analyse what needs to be done to increase the value of the business, and spend the next five years making those changes. This way you will steadily increase the value of the business, he says.

Every entrepreneur has an exit strategy – they know what they want and need to do to make their exit strategy play out as expected. In many cases, financial advisers don’t think this way. “A lasting piece of advice is to act like an adviser but think like an entrepreneur.”

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