‘Never too early, often too late’: Thinking about succession planning

With business owners very rarely planning their exit from the advice practice in advance, three experts underscore why succession planning is critical for long-term success.

Succession planning has historically been a weak spot for financial advice practices and this year proves to be no exception, wrote Adviser Ratings in its 2024 Australian Financial Advice Landscape report.

Some 40 per cent of firms have not nominated a successor and say they don’t need one, the report discovered, while 30 per cent say they need a successor but haven’t begun the search.

On the other hand, 13 per cent of overall firms say they are actively working on it and 17 per cent have a successor already in place.

The lack of preparation can also be seen among firms which will otherwise be identified as “high performers”. Macquarie found only 4 per cent of high-performing firms – the top quartile of firms based on gross profit – have detailed documentation around their succession plans.

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“Succession planning is never considered too early, yet is often discussed too late,” Macquarie’s Financial Advice Benchmarking report stated, which surveyed 312 advice firms.

With these discussions often falling down advisers’ priority lists, Money Management spoke with three industry experts to unpack the challenges surrounding succession planning in the financial advice space.

Delayed discussions

According to Stephen Prendeville, founder and director of Forte Asset Solutions, advisers “very rarely” plan their exit from the practice in advance which presents problems later on down the line.

“Normally a business owner won’t plan their exit, but all of a sudden they will have an event where they want to get out quickly. It could be their health or they wake up and want to leave. For financial planners, very rarely is it a planned exit,” he told Money Management.

The four common “trigger events” that prompt an adviser to think about their succession and may necessitate a sudden action are:

• Death
• Disability
• Retirement
• Resignation

Similarly, John Birt, chief executive of Radar Results, said advisers commonly delay succession conversations due to the immediate day-to-day pressures of operating a business.

“Advisers often keep putting it off and are a bit tardy in getting it organised. That’s just human nature; it’s the ‘we’ll take care of it when the time comes’ type of attitude,” he remarked.

The earlier report from Adviser Ratings also noted this, saying: “Traditionally, smaller businesses in particular have told us day-to-day operations have taken up a lot of time and sidetracked future planning. A minority of AFSLs offer succession support, but most advisers told us they do not utilise these services.”

The vast majority of advice businesses will opt to go down the selling route, according to Birt, largely due to its immediate nature, particularly if it has been prompted by a trigger event.

In contrast, succession planning can take several years to train up and prepare potential successors and is more of a gradual ongoing process that advisers need to commit to completing.

“Succession takes three to five years, whereas a sale will take up to 12 months. The successor also has to go guarantor, so there’s a financial risk and they may need to wait longer if the owner’s exit is delayed, while a sale is fairly straightforward,” Prendeville said.

Staying ahead of the game

In light of these considerations, both Prendeville and Birt encouraged advice leaders to begin having succession or M&A discussions sooner rather than later.

This means having early conversations with potential successors in the business, rather than investing in advisers who do not desire future ownership, commented Olivia Ellis, head of accounting and financial services at Macquarie Business Banking.

“To mitigate this, advice firms should initiate succession discussions early to prevent potential missed opportunities. The advice industry has faced a reduced talent pool since 2018, which is now stabilising with an increasing number of advisers entering the industry again, highlighting the need for robust succession planning,” she said.

“Planning succession early can set firms up for long-term success. When we talk to our clients, we suggest that they consider succession planning regardless of which stage their business is in. We do this because we know that these discussions can unlock value, ensure sustainability, nurture talent and ultimately protect businesses.”

Not only does it provide reassurance about the future of the business, it also helps the business in the present day, with the Macquarie report finding those which had an effective succession place saw profits of $684,148 per owner compared to $355,446 for those without a documented plan.

By strategically planning for transition ahead of a sudden trigger event, advice firms can also mitigate risks associated with sole ownership and key person dependency, Ellis added. A successful plan is one which is reviewed annually and has a documented agreement between the owner and successor.

Moreover, Birt urged advice leaders to prioritise succession and M&A planning at every stage of the business, which includes keeping an eye out for potential opportunities when they arise.

“Owners should be on the lookout all the time for the right buyers to purchase the practice and actually pull the trigger when the time is right before they disappear. When the right buyer comes along with the cash, just make it happen, otherwise you could be thinking later down the track: ‘I wish I had taken that offer three years ago’,” he said.

Whether it be finding an internal successor or searching for the right merger partner, practices should aim to be in the best possible position to lock in a successful deal, according to Prendeville.

“[The business] needs to be growing and have systems and processes driving high profits, so it’s treated by any third party as an attractive asset,” he concluded.