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Succession planning – maintaining your independence may be more valuable than you think

Published: October 6, 2015 by Rob Macdonald, Fundhouse

Succession is a key issue for independent financial advisers. Without a sound succession plan it is very difficult to build real value in your business. Probably more importantly, your clients are vulnerable if you don’t have a well-considered plan.

In a recent survey of 314 IFAs in SA by Insight Discovery, 64% of the IFA respondents were over the age of 50, and a further 20% were over the age of 40. Put another way, only 16% of the respondents were under the age of 40. Despite what might seem a small respondent group, it is safe to say that it can be regarded as a representative sample of the IFA community in South Africa. With this age profile, it is not surprising that many IFAs we that we deal with are considering their succession options. Furthermore, the introduction of RDR may either force change in, or closure of, many IFA businesses.

It is thus not surprising that there are many succession solutions on offer to IFAs. Larger financial institutions and corporate financial planning businesses appear most active as prospective buyers of IFA businesses. What better way to retire as an IFA than by being bought out by a corporate that offers a good deal and has the resources to look after your clients after your departure? Similarly, to survive under RDR, can you really do it without a “big-brother”, like a well resourced corporate? The re-assurance of both these propositions is clear. The key question for any IFA to consider though, is to what extent do you believe in the value of sound independent advice?

Corporate financial planning businesses undoubtedly can offer IFAs significant resources to help transition their businesses. Similarly there is no reason why they cannot offer sound financial advice. In fact in many cases it is possible that a corporate advisor will provide better advice than an IFA simply because they are better resourced.

But when an IFA sells to an institution or corporate that offers not only advice, but also all the products to implement that advice, the independent nature of that advice is compromised. The incentive to use “in-house” products is clear. Whilst this may not necessarily compromise the client outcomes, there will always be a question mark over whether the solution being offered is best for the client, or best for the corporate. This is no doubt the reason why RDR sees the categorization of financial advisers as an important issue, and why clients will need to know whether their financial adviser is tied, multi-tied or independent.

Our view is that the value of independent advice will grow under RDR, and that IFAs who can retain their independence will be the ultimate winners in the financial planning space. The Insight Discovery research indicates that internal succession is the preferred option for IFAs and we think it is the most appealing for a number of reasons.

Firstly, you can guide and mentor your successor. This can be very reassuring for clients who have bought into your philosophy and approach. Secondly, your successor can develop a relationship with your clients while you are still at the helm. Your clients trust you, and invariably they will be reassured by the fact that you are introducing them to your successor. Thirdly, it means that you can have full control over how you unlock the value of your business. IFAs often underestimate the value of their businesses; hence the offers that corporates make appear so attractive.

Internal succession has challenges. Most common is finding the “right” person or people as successors. Often advisers are looking for a “mini-me” to take over their business, forgetting that their business is at a different stage from when they started it, needing different skills.

Funding the purchase of the outgoing shareholder’s shares is a second challenge. Often the potential successor either needs to borrow the money from the outgoing shareholder himself or herself, or this funding is via bonus and dividend payments that are foregone until the equity has been fully paid for. A third challenge is that very often the exiting owner, particularly if they were the founder of the business, struggle to let go of the reins, even after they have sold some or all of their shares.

Despite these challenges, a key benefit of internal succession is that the owner or principal has full control over the process. You can determine your own destiny. And if the task seems too daunting to do it on your own, you can always get help to plan and manage your succession in your preferred way. Our view is that unlocking the full value of your business and continuing to offer independent advice to your clients are potential rewards that are worth the effort.