Global and local trends reveal that very few financial advisers have a clear plan as it relates to continuity and retirement from the industry. In the absence of a succession plan, advisers face several regulatory, personal and business risks. Daniel van Andel, head of IFA Proposition, examines how advisers can go about planning for succession.
Roald Dahl’s iconic children’s novel Charlie and the chocolate factory contains several important life lessons. But looking through a different lens, the key theme is clear: succession planning.
Willy Wonka, the enigmatic founder of the Wonka Candy Company, goes on search for a successor after devising a plan to hide five golden tickets inside five chocolate bars, with the lucky winners invited on a tour of the factory. The tour, having tested and eliminated unworthy candidates, ends with Charlie Bucket being unveiled as the worthy successor.
There is a lesson for financial advisers to be learnt from this tale: Willy Wonka was intentional about finding a suitable successor for his business; he took the time to formulate a plan for a leadership transition. David Grau Snr, FP Transition founder, and author of Succession Planning for Financial Advisers: Building an enduring business, defines succession planning as the seamless and gradual transition of ownership and leadership internally to the next generation of advisers.
As a financial adviser, much of your time is spent helping others plan for their retirement, but how much time are you spending on strategising your own retirement and exit plan? Very little, according to international research, which reveals that around 70% of financial advisers in the US lack a formal strategy for succession planning. Retiring from your business can feel like you’re abandoning your baby, but having no plan in place exposes your practice, clients and dependants to significant risk in the event of your passing. Beyond this, developing a strategy that you are able to communicate to your clients, will help foster confidence in your business.
Getting started
It is never too early to start planning for your retirement. In fact, it is recommended to formulate a plan at least a decade ahead of your intended retirement horizon. So how do you get the ball rolling? Start by considering these questions:
- Do you want to transition into retirement through a ‘sell and stay’ arrangement, or do you have a hard retirement date in mind?
- How would you like your clients to be taken care of?
- What legacy would you like to leave behind? Are you building a practice to sell to a business or an adviser, or are you building a company for yourself as a lifestyle business?
The answers to these questions will essentially form the foundation from which you can determine the option that works best for you.
Drawing on learnings obtained through our work with advisers via our investment platform, we’ve identified three core succession planning strategies you can consider ahead of retirement. But as with every other aspect of retirement planning, the earlier you put your plan in place, the more time there is to action it.
1. Find yourself a Charlie
Finding a Charlie means actively recruiting, equipping and overseeing the leadership and management transition of your business to a new generation of advisers – like Willy Wonka did. This transition typically occurs internally through the grooming of a successor over time, but it can also mean searching externally for a suitable partner to take over. For a founding adviser, this option requires a shift in skillset because you need to evolve from playing a client-facing adviser role to playing an operator role within the business.
Factors to consider:
- Company culture – Having spent decades building your practice, you wouldn’t want to jeopardise your legacy by choosing an unsuitable successor. It is important that the person or people you identify to succeed you, buy into your company culture and business values.
- Leadership characteristics – Know what characteristics you are looking for in a leader. This will help you identify potential successors to groom and develop.
- Competitive benefits and remuneration – An effective way of attracting and retaining the best talent is by offering competitive remuneration packages.
- Changing your business ownership structure – Amending your business ownership structure to allow for additional owners sends a strong message about your end goal.
2. Sell to another business
The second option is to find a suitable buyer for your business. The nature of this kind of transaction could be an immediate transfer of clients or a gradual transition to the buyer over time, the terms of which need to be established between the buyer and seller. These terms include a suitable price for the business, the conditions of payment and the transition period for the seller.
Factors to consider:
- What is their investment philosophy, management and communication style? It is critical to do your homework and understand your potential buyer’s investment philosophy to ensure synergy. Make sure that your core values are aligned.
- What are their future objectives? Assess what their medium- to long-term goals are and whether these would inspire confidence from your clients.
- How are clients serviced? Consider how the business services its clients. Make sure you choose a partner who is as client-centric as you are.
3. Become a lifestyle business
The third option is to do nothing except find a continuity partner. This partner would become available to your clients in the event of your passing or if you become disabled. While various structures can be agreed upon, the basic idea is to provide your heirs and clients with security that should anything happen to you, they will be taken care of.
For your heirs, a buy-and-sell agreement funded by an insurance policy should ensure that the value of the business is monetarily captured as an inheritance. For your clients, a trusted continuity partner is available to ensure the continued execution of their financial plans.
Once this risk has been mitigated, you can continue to provide advice to your clients on condition that you are still able-bodied to do so. Many advisers who opt for this option then view their ongoing fee as an annuity stream to fund their retirement income, while scaling back on the number of clients they are advising, and freeing up more time for leisure.
Factors to consider:
- Does your potential continuity partner have the capacity? The size of the business and assets under management becomes an important consideration when looking for a continuity partner. Make sure that they have the capacity to service the influx of new clients in the event of your death or if you become disabled.
- You could lose clients – If you’re going to pursue this strategy, proceed with caution because there is a chance that your clients could begin to seek advice elsewhere and the value of this annuity stream can decline as you age. If you ever seek to sell, most buyers will not pay a premium for a business that is experiencing a decline in the client base. Having said that, there are always advisers looking to grow their practices through acquisition.
- Do they have the suitable expertise and experience?
Plan carefully
All three strategies lead to the same outcome, which is an exit from the industry. The manner in which these strategies are implemented will, however, determine the quality of your exit. As Willy Wonka has shown us, successfully implementing a sound strategy leads to rewarding outcomes.
In our next article in the series, we will explore how to determine what your business is worth.