Ignorance is bliss

Quick fix solutions, often driven by client demand, won’t serve the financial planning profession in the long run, Paul Barrett writes.

You’ve seen it all before. Clients, who need drastic action, right here, right now. Clients who have been living blissfully beyond their means. Clients who think long-term is next week.  Living life blissfully unaware of tomorrow’s obligations can be fun. However when the music stops and the lights come on there can be a lot of cleaning up to do.  Thankfully those people who have sought advice can live the life they want today, and know that the music will keep on playing. 

Real financial security can only be attained by taking a realistic long-term view, planning ahead, and executing a financial planning strategy slowly but surely - from today. 

Isn’t it ironic, don’t you think (thanks Alanis), that the small business owners whom superbly service these clients fall into the exact same blissful trap. 

Financial planners have told me that they established their practices for a handful of important reasons: 

1.  A burning desire to enrich and protect the lives of their fellow citizens 
2.  To create a sustainable business that will generate profits, and enable employment opportunities and careers to flourish 
3.  To create an asset that someday will be valuable to someone else with the same client-centred motives. 

It seems that most successful planners I talk to have point one and two (above) clearly covered.  It’s the third point that they struggle with. Sometimes this is referred to as succession planning. I prefer to think of it as 'making a difference’. 

It 'makes a difference’ to create a business so successful that people want to be your client, they want to be your employee, they want to be investors in the business, long after you have retired. 

The problem is that many practice owners don’t consider succession until they’ve started planning the date and venue for their retirement function. By then you are a price taker, not a price maker. 

Speaking with practice owners whom understand this is enlightening. They say they started planning for succession about ten years out from retirement. This provides enough runway to achieve the following: 

1.  Identify the best candidates for owning and running the business into the future 
2.  Introduce the new advisers to clients 
3.  Achieve their growth targets to enable the optimal valuation  
4.  Secure funding to enable the execution of their strategy. 

Success can create its own unique problems. Many successful firms have become large, and highly profitable.  Solving for succession is an even more complex challenge for these firms. Who has the funding sources to buy the firm, over what timeframes, and for how much?   

A most important (and almost always overlooked) issue to consider for these successful firms is “what are the motives of the buyer?”.  Given the pool of purchasers is probably smaller for large businesses, the practice owner needs to truly assess the motives of the purchaser. Are they truly committed to the client relationships that you have carefully nurtured over many years? Do they truly believe in continuing to build a sustainable business that will enable careers to flourish? Or do they just have deep pockets and seek high return on equity? 

This succession-planning conundrum is becoming more and more obvious as some of the industry’s most successful large firms begin to confront the issue. We have seen listings, we have seen acquisitions by institutions, and management buyouts over the last few years.  Most of these moves have been fuelled by one party requiring an exit strategy and another party requiring a growth strategy. The problem with this can be that 'exiting’ and 'growing’ are usually diametrically opposed.  There have been studies over the years that conclude that acquisitions seldom produce win:win outcomes.  More often than not it’s the Acquirer and/or the client who lose out. 

Vendors should not be happy about this. Successful succession needs true alignment of interests. This can only occur if the vendor starts planning early enough that they can execute an exit strategy whilst continuing to grow.  That way the vendor and the acquirer’s interests can be met, all the while sustainably serving the community and employees. 

Financial planners need not be like a plumber with a leaky tap. Take control of your own future and start planning today. You owe it to your clients and your staff. If you start opening your mind to succession today you’ll be surprised to find that there are genuinely aligned options just around the corner. 

Remember your motives (above). Stay true to them. That way you can always look back at a successful career knowing you genuinely “made a difference”. 

Paul Barrett is CEO of Next Generation Advisory.