Choosing the right successor for your advice practice

Money Management explores the pros and cons of appointing a younger staff member as your successor, and why financial advisers shouldn’t underestimate their skills.

With business owners very rarely planning their exit from the advice practice in advance, Money Management recently explored why initiating early succession plan discussions is critical for long-term success.

With succession in mind, business owners may look to their younger staff for a potential successor to take on the advice practice and preserve the existing culture, as opposed to selling externally or merging with another business.

However, choosing a successor poses its own obstacles: younger staff can be highly skilled in the world of financial planning and portfolio management, but may lack the necessary skill set and motivation to run a business.

Younger aged workers are also more likely to change careers, with research from Deloitte and Iress revealing that three-quarters of those looking to depart the industry are advisers aged under 40.

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Managing an advice practice or an Australian financial services licensee involves client meetings and maintaining client relationships, regulatory compliance, administrative duties, staff training, recruitment, and providing financial advice.

Interestingly, Ensombl previously ranked practice management as the top discussion point among advisers on its platform, as they increasingly find themselves acting as business owners and people managers, as well as advice professionals.

Speaking to Money Management, Stephen Prendeville, founder and director of Forte Asset Solutions, explained: “A lot of the new generation of advisers are very good technically, but don’t have any aspirations to actually own the business and take that additional risk.

“Succession is intellectually and philosophically attractive because it retains the culture and means you’ve coached someone to be in the ultimate position of taking your seat, but it is financially really hard to achieve.

“You might have someone who could do the job, but they can’t afford to buy the whole business or might not have the skill set, risk appetite or desire to be a business owner.”

Purchasing an advice practice can cost anywhere from $500,000 to more than $5 million, according to Forte Asset Solutions’ marketplace.

Aligning with Prendeville, John Birt, chief executive of Radar Results, acknowledged that younger advisers may not have the financial resources or risk capacity to buy into the business.

“Owners think their staff want to or can buy, but they might not have the funds to do it. Or if the staff do have the funds, it may be too risky of an investment. It’s one thing when the owner wants to sell down, but the people on the other end must want to take on that responsibility,” he remarked.

However, Olivia Ellis, head of accounting and financial services at Macquarie Business Banking, said younger advisers shouldn’t necessarily underestimate their capacity to participate in succession plans and that, if they were interested in taking on a business, options were available.

“Junior staff may underestimate their ability to participate in succession plans, despite viable funding options being available earlier than they may anticipate. It’s worth business owners making potential future leaders aware of options that may be available to them,” she said.

A potential financing option for young staff interested in taking on the practice is through vendor finance, noted Birt, which is an internal form of lending where the seller lends the buyer money to help pay for what is being sold over a number of years.

“So the owner is actually doing the funding themselves and charging an interest rate to the employee. Vendor finance is quite popular these days,” he said.

However, this route is not for everyone due to the risks involved, he added, particularly for owners who are looking to retire or exit the business in a quicker time frame.