Succession planning: when is it too late?

T he most common criticism of a planner’s approach to succession management is that by the time the planner thinks of it, it’s too late.

That is, the issue of succession management often occurs to planners only after they have decided to exit the industry and plan to do so relatively quickly.

The end result of these two factors can be that planners sell their businesses for whatever price is on offer because they have not developed any of their staff to succeed them.

“Succession planning has got to happen way before you decide to leave the industry,” Guest McLeod senior partner Timothy Rossell says.

“It comes down to showing people in your business who are willing to buy your shares that you can put a tangible value on these shares and that someone wants to buy them.”

Rossell says the central premise of succession planning is moving beyond the idea of operating a one-man-band financial planning business.

This is because if one person is central to creating value in the business, should that person leave the practice, it will have a significant effect on the future of the business for the other employees.

Further, if the business should be sold, the price received will be significantly less if the perception exists that no-one else is generating value in the business.

“When the business is just them, there is nothing to buy,” Rossell says.

He says planners are not particularly advanced in thinking about succession planning issues. Rossell points to the success larger dealer groups have had in gobbling up the smaller independent financial advisers as proof.

“There was a whole lot of people out there who hadn’t come to terms with succession planning, so the sale was an instant fix,” he says.

However Rossell says unless someone offers “stupid numbers”, a planner looking to exit the industry is better off in the long run to have gone through a succession planning strategy.

“This is because it is worth more to someone who wants to run the practice than those who want to buy it,” he says.

AMP planner and joint principal of the KRA Group Mark O’Leary agrees and says if a buyer knew that the principals of his business were planning to retire, they would not get the price they wanted for the business.

He views succession planning as being central to bringing new clients to his business, as well as helping to retain value in business.

O’Leary first went through a succession planning strategy when he and partner Alan Crosby purchased the business 11 years ago. However, while the initial stages went well, they fell into the trap of not getting the post succession planning right.

“Simply because the person [previous owner] was not prepared to introduce us to their database,” he says.

Since acquiring the business, the joint principals have focused on building up the right personnel and putting a succession planning strategy in place.

“We have put on two young guys who are studying towards their CFPs. One is technical and one is more of a sales role involved with segmenting the client base,” O’Leary says.

These employees have been with the company for two to three years. O’Leary says he has communicated to them their importance in the business and its plans to offer them equity in the business in the future.

“We understand that young people are very ambitious. They can’t have their own clients but they can have equity,” he says.

O’Leary says it has not been too difficult to pass responsibility onto the younger business members.

“As long as they have assured people and had the people skills, and could treat clients with respect, as well as having the credentials, we really haven’t had a problem with that,” he says.

Another practice with a succession planning strategy in place is Gannon Growden Schonell and Associates, which has put great emphasis on the educational standards of the young people it recruits to join the company.

Adopted when the three businesses were amalgamated, the succession planning strategy has seen the number of shareholders in the business grow from three to eight.

Since 1992, the company has recruited university graduates with either an economics or commerce qualification. The number of recruits taken in any one year can be as high as three, and all recruits must commence CFP studies, which the company pays for.

The graduates do not talk to clients until they have completed their CFP studies and in the meantime, gain experience in all facets of the business.

The advantages of involving graduates in the business are that the business is training its own advisers so that they are moulded to the principals of the business; and they are salaried employees, which represents a departure from commissions, and eliminates the business-within-a-business syndrome.

Gannon explains this syndrome as the process whereby planners develop their own client relationships and take them with them when they move on.

However, in his business’ approach, the adviser’s assets become the shares in the business and not the client, which always remains the property of the business.

“We spend a lot of time communicating with trainees and outlining their career advancement through the business to ultimately a shareholding,” Gannon says.

He says the strategy has developed now to the point where the company can massage the strategy and place in the process some more experienced people and people not necessarily from the financial planning industry.

O’Leary says the key to giving younger people responsibilities in the company is selecting the right people. He says indicators such as contribution to the office, leadership, initiative and performance, guide his practice’s decision on who are the right people to back.

He says the industry perception that clients don’t like talking to younger planners is just not true.

“The reality is that a lot of clients love working with younger people. They have a professional relationship with us and the professional relationship with the young,” O’Leary says.