The secrets of successful succession planning

While grandfathering appears to have put a halt on succession planning, the reality is that wider issues have been exposed and, as Jason Spits writes, planners are looking deeper than ever into what it takes to participate in a succession plan.

Succession planning for financial planners has been a long-running business concern, but to date few things – apart from adviser reluctance to think about it – have interfered with the well-worn path to moving a practice into the hands of another planner. 

However, the concerns around grandfathering which have come out of the Future of Financial Advice (FOFA) reforms have, for the first time in many years, placed some roadblocks in the path of planners looking at enacting a succession plan. 

Guardian Advice executive manager Simon Harris describes the current impasse around grandfathering as the ‘Hotel California provision’, where planners are able to ‘check out any time you like but you can never leave’. 

Yet despite the headlines around the nature of the grandfathering problem, Harris said FOFA has not created a rush of planners looking to enact succession plans, nor has it drastically put the brakes on those currently engaged in a succession. 

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“We are seeing less succession plans than expected but anticipate that other regulatory changes, such as RG146 around education and the Tax Agents Services Act (TASA), will have a greater effect as planners have to change their level of qualifications,” Harris said. 

“Planners are saying these are more likely to be triggers than FOFA, which has caused a trickle and not the flood of successions many expected.” 

Peloton Partners principal Michael Harrison said that while FOFA had not caused the flight of advisers as expected, it has pushed to market a number of smaller books of business with questionable value under the new regime. 

“These are books of business that planners have not been able to FOFA-proof and are now selling, triggered by Fee Disclosure Statements (FDSs) and opt-in provisions that make them harder to service,” Harris said. 

And it is here that FOFA has made the biggest change to succession planning, according to Harrison’s colleague at Peloton Partners, Rob Jones. 

“We are starting to see degrees of value being placed across different planning business but also within the business, where potential buyers are segregating parts of a business based on its value in the new regulatory environment,” Jones said. 

“Planners are starting to look at businesses and working out what is the good, the bad and the ugly when it comes to ongoing value, and enacting or participating in succession plans based on what they find.” 

Connect Financial Services Brokers chief executive Paul Tynan said this focus on value, teamed with the uncertainty around grandfathering, means planners are no longer valuing businesses based on multiples of recurring income but on profit and loss. 

“Under previous models planners who sold under the multiples model effectively took the profit out of the business and this makes it harder to sell, particularly if the business is being sold as a complete operation,” Tynan said. 

“Planners are shifting to an earnings before income tax model because it is easier to demonstrate the value in the business and what has contributed to that value.” 

Securitor Western Australia state manager Fabian Ross said this shift is sensible given that many other advisory professions operate in this manner and value businesses during successions using a profit and loss model. 

“This is taking place because FOFA has put the spotlight on the planner’s business and in particular the book of clients and forced people to consider what they are selling or buying,” Ross said. 

“Are planners buying a book of active business relationships that they can maintain well into the future supported by modern business systems – or a list of names that have not been contacted for years and offer no long term value? 

“This is the significant change that FOFA has brought. Planners are drilling down with greater levels of sophistication and valuing business segments individually and asking if FDSs are in place and if opt-in provisions apply,” Ross said. 

According to Jones, planners are seeking ‘protection’ from FOFA legislation by being selective about what they will take on in a succession plan, with the key requirement of ‘know your client’ becoming a key issue for buyers and sellers of planning practices. 

If an outgoing planning principal can articulate the service proposition of a practice and its application to clients then that is attractive to buyers, Jones said – but if not then many would consider the practice to be operating off a legacy and is not a future-facing business. 

Yet Jones claims that the idea of a legacy, which often carries negative connotations in financial services, should be redefined towards its true meaning of a solid base and foundation to build upon for the future. 

“A legacy in financial services implies a dead weight, but planners should redefine it as a valuable resource that is useful for the ongoing work of a planning practice.

"However to do this means re-establishing relationships with some clients, reviewing their value to the practice and shifting them back into being active and engaged clients,” Jones said. 

“This is a useful exercise under FOFA, but also a vital part of any succession planning process that aims to succeed and provide value to the buyer and the seller.” 

This type of work is not a short-term exercise, Harris said, with succession planning being a long-term plan enacted by a financial planner – ideally five years before they intend to move on. 

“Succession planning is a long-duration exercise, which is why we have not seen FOFA as an interruption in this space.

"The length of time it takes to build and work through a sound succession plan is a number of years in the making, which is also why these things are not happening on a weekly basis,” Harris said. 

“There are many planners who are approaching the final years of their working life who have not prepared a succession plan, but if they are looking at phasing down their involvement in the next five years then they need to act now.” 

Planners who have put in place a workable succession plan usually have set out timelines for when the plan will enact as well as how the business will be passed on to its new owner, said Ross, with many planners now opting to release equity over a number of years instead of selling the practice in one tranche. 

Ross said the reason for this is that planning practices can be too big for a succeeding planner to buy outright, and they are reluctant to take on large levels of debt to make the purchase.

At the same time the incoming and outgoing principal are able to review the business and ensure they share the same vision and culture, so the practice can continue and can maintain its clients. 

“We had a recent case where the principal wanted to continue working three days a week and still see clients while mentoring his successor, which was seen as a good result by the younger planner as it kept the experience within the practice and maintained the internal culture that had been built over the years,” Ross said.  

As an independent consultant, Harrison said that not enough planners are willing to carry out the review which leads to forming a succession plan. 

“We find it hard to get successful business owners to lift the bonnet because they don’t want to expose the weaknesses they know are in their business – but it is the only way to measure what key metrics affect the value of the business and how they can secure and enhance its value,” Harrison said. 

“These are the conversations younger planners want to have. They want to know about legacy issues and clients and how they are being addressed by technology, social media, back office and business systems.” 

This push by younger planners is also a result of FOFA, with Harris stating that two generations and two cultures of financial planning were meeting more than ever as new regulations aim for coherence in the planning sector. 

“Aligning cultures in a succession plan is more art than science and comes down to questions of ‘Do we like each other?’ and ‘Can we work together during a transition?’ as much as ‘What are the mechanics of the planning practice?’,” Harris said. 

“At the same time the similarities between Generation X planners and Baby Boomer planners are close enough that most successions are between these two generations. Generation X planners have a lot of time and respect for the trail-blazers among the Boomers who formed the industry years ago. 

“However I still have to remind the Generation X planners to slow down and not underestimate the time, capital and work needed to succeed another planner, while also reminding older planners to hurry up and prepare their succession plan so they are ready when they want to get out.” 

According to Ross this ‘hastening-slowly’ will become a central issue in succession planning as more Generation X planners are beginning the conversations with their older colleagues about orderly transitions from one generation to the next. 

“Generation X and even Y planners are asking how they can get equity, and business owners are becoming more comfortable with these conversations as they look for ways to release equity and pass on control of their business,” Ross said. 

“In this regard FOFA has been a good thing for succession planning. It is leading to more discussions around what is a valuable planning business, and has forced a reconsideration of how to treat legacy books of business.

"It will be seen as a good step forward because it is bringing planning out of the cottage industry model and forcing planners to operate as businesses focused on clients.”