The cost of death on advice practices

With financial advice directors often leaving succession planning too late, a sudden death can reduce the value of an advice firm by up to 30 per cent.

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

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

In a conversation with Money Management, Radar Results chief executive John Birt explained what might occur in the event of a sole advice owner passing away due to sudden illness.

“Most financial planners don’t do preparation work in terms of succession planning. They might be in their 60s or 70s, and say, ‘I’ll get around to it one day’, and they just don’t. They are very lethargic about it,” he said.

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“These days, many financial planning firms do have a number of partners or directors in the business, so if one of them suddenly dies, it’s not the end of the world. If you are a sole practitioner, then it is the end of the world.”

Since establishing Radar Results in 2005 to help owners sell, buy, or merge their financial planning practice, Birt has sold seven businesses where the owner has left it too late and passed away before selling the practice.

“They’re in their 60s or 70s, maybe even early 80s, and they’re still working. I’ve said to many advisers: ‘Just don’t die at your desk.’”

Following the owner’s unexpected passing, the advice practice is often handed down to their partner, who likely has no intention to retain the business, no idea how to run it or no idea of its monetary value as an asset.

Unlike when a director is able to enact a handover or remain on hand for continuity with existing clients, a key problem which arises in this scenario is that clients’ longstanding trust in the adviser goes with them. This mean client numbers may reduce, Birt acknowledged, highlighting the problem of key person risk on a practice. 

“There’s no trust there anymore to transfer to a new adviser – the trust dies with the adviser and the client relationships can die with them too,” he said.

“When the trusted adviser is not around anymore, their clients may jump ship to another adviser. But transferring client relationships to another adviser is problematic because they are a stranger to them. Some people have been using their adviser for 20 years, sometimes even 30 years.”

The potential loss of clients consequently impacts the price of the business being sold, the CEO added, with deceased estates tending to sell for approximately 30 per cent less than the market value.

“There’s a good chance that the new adviser won’t get all the clients, and therefore the buyer loses money. So many advisers or buyers in that situation impose a discount straightaway, or they will only pay 50 per cent of the money upfront and see how many clients are left in 12 months or two years’ time, which is a way to safeguard the value of the business.”

Purchasing an advice practice where the owner has died also poses a significant client retention risk for the buyer even if they secure a discount, with buyers urged to engage with clients as early as possible in hopes of demonstrating future stability. 

Birt continued: “[The new owner] hopes they can connect with all the clients somehow, whether it’s over the phone or a face-to-face meeting, and try to have at least half of them stay in the new business. They try to build up or start those relationships from scratch again.”

Having faced a handful of these difficult yet rare situations, Birt encouraged business owners in financial advice to begin thinking about succession planning when they reach their 50s, if not earlier.

“If you haven’t started by the time you’re 50 years old, you might miss the boat – you really want to start in your 50s if you are planning to retire in your 60s.”