Exit ahead – Increasing succession value through a more client-centred approach
What happens to clients when an adviser exits a firm?
“Demography is destiny.” This expression, frequently attributed to French philosopher Auguste Comte, succinctly summarises the inevitability of ageing and all that it brings.
In a financial advice context, where the market landscape is dominated by small firms, and where a significant proportion of advisers are over age 50[1], demography means advisers will continue to exit practices frequently and in significant numbers.
The lack of succession planning among Australian financial advice firms – the vast majority of which have no formal plans in place – is well documented. Most narratives around business succession relate to hard financial metrics, such as multiples, recurring revenues, book sizes, sale prices etc.
As such, the perspective through which many view succession planning is as a tool to maximise the financial value that can be realised upon exit.
But perhaps this perspective needs to be reframed, as there is more at stake than just financial considerations. There is the emotional investment an adviser has made in the firm they built. There is their desire to be fulfilled in retirement. There is the wellbeing of the staff who helped build a business. And, of course, there are the clients.
Most advisers say they are in this profession because they love their clients. They love helping them realise their dreams and they cherish the deep relationships they form with them over time. But what happens to those clients when an adviser exits a firm?
According to Business Health, around two thirds (64%) of clients say they only want to deal with their current adviser and would not be comfortable dealing with any other adviser from that practice[2]. Combine this with data[3] suggesting 66% of people receiving inheritances don’t want to deal with their parents’ adviser and you start to see the beginnings of a major advice disconnect, a disconnect that will only grow as the $3 trillion-dollar intergenerational wealth transfer starts to accelerate.
The point is that we perhaps need to take a more client-centric approach to practice succession planning.
Putting clients (and their children) at the centre of such plans means they can continue to be served and cared for in the way they always have been, and will stay loyal beyond the exit of their advisers.
And happily, this also means advisers can maximise the emotional and financial value they can realise upon their leaving the business they built.
The numbers are bleak
For the principals of many small advice practices, and indeed most small business owners generally, ‘their business is their superannuation’. But paradoxically, a profession based on helping clients plan their futures is surprisingly lacking in enthusiasm when it comes to planning their own.
According to “Business Health’s 2022 Future Ready Report”[4], roughly three quarters (76%) of practices have no written succession plan for their practice, and only 5% have a formal plan for which funding is in place and is regularly reviewed.
A further study[5] reinforced the low priority Australian advisers were giving to succession planning, with only 18% believing succession planning would be critical to their medium-term business success (compared to 53% who said technology).
(Australian advisers can at least take heart from the knowledge that they aren’t alone, one US study[6] found 64% of practices had no formal succession plans).
But the benefits are obvious
A formal approach to succession planning can help in many ways:
- it can help attract better talent to the practice by giving them more confidence about the future (and potentially the ability to own a stake)
- it can help retain key staff for the same reasons, and
- having better talent, and exposing your clients to that talent, is likely to improve client retention.
Roll these things up and you get a more financially healthy business. The same Business Health study referenced above found that:
- firms with some sort of written succession plans were on average 33% more profitable than firms with no plans, and
- firms with a written and funded plan that was regularly reviewed and updated were a whopping 131% more profitable than firms with no plans[7].
Coincidence? Unlikely.
Succession scenarios
There are generally three types of succession scenarios to plan for:
- internal succession – where the business is sold to staff and other partners
- merge with another business
- sale to another business.
These scenarios are ‘controlled’ in the sense that the adviser is in a position to control its implementation.
A fourth scenario which can unfold is when an exit is sudden and forced due to external events such as death or ill health. These ‘uncontrolled’ scenarios call for continuity planning rather than succession planning. While this won’t be covered in this article, many of the principles are applicable, and a robust succession plan should indeed be a fundamental component of any continuity plan.
Of the three main scenarios, internal succession would likely be the first choice of many, offering the advantage of ongoing cash flow, the ability to continue working if they choose to do so, and the satisfaction of seeing their creation live on. But of course, circumstances may dictate otherwise and internal successions are certainly much harder for one-adviser practices.
A US study[8] of practice principals found them evenly split in terms of their preference for an internal succession over a merger or sale to another firm. A little less than half (45%) of those surveyed said it was very likely they would sell or merge their firm with a third party, with 39% saying they expected to sell to their current employees.
Regardless of whether the path chosen is internal or external, succession transactions can be incredibly complex, with many moving parts (valuation, documentation, successor selection, client transition, and staff retention – just to name a few).
It’s little wonder then that successful succession requires a lot of planning and a lot of time, with most experts suggesting a timeframe in the vicinity of five years.
Risk management
To the extent that client relationships are the ultimate asset (and purpose) of any practice, putting client considerations at the centre of any succession planning makes sense on two levels.
Firstly, those client relationships are generally cherished by advisers beyond mere financial value.
Secondly, succession planning can be thought of as a risk management mechanism, helping ensure your clients can continue to receive the service and advice they need.
It’s worth noting that in Australia, public accountants – who share many similarities with financial advisers – are required to formally document their succession plans as part of their overall risk management framework under Accounting Professional and Ethical Standard (APES) 325[9].
(CPA Australia has made an extensive range of resources available to help members prepare, document, and implement succession plans. These resources, many of which are equally applicable to financial advisers, are freely accessible online at the CPA website.)
A client-centred approach
The obvious first step in creating a firm that can outlive its founder is to transition client relationship responsibilities. After all, if the founder is going to exit the business and the business wants to sustain, it needs a way to sustain the client relationships without the founder’s ongoing involvement.
Ideally, this transition is one that is done over months, even years, as clients and new advisers become comfortable with each other, while with the original adviser remains involved.
In simple terms, it means over this time client meetings should involve both old and new advisers. Transitioning clients is not merely a matter of who does the actual client work, but who runs the client meetings, controls the agenda with the client, and ultimately, where people even sit in the meeting. If the client is going to perceive the ‘new’ adviser as their primary adviser going forward, that person eventually needs to control the meeting and figuratively (or even literally) sit at the head of the table. Sitting ‘second chair’ after driving the business and client relationships for so long can be challenging for everyone, not just the original adviser, which is why this needs to be done gradually.
It’s also important to do this in a way that is not seen as forcing a new adviser on a client, and in that regard, the future retirement plans of the adviser need not be the explicit reason. Many practices likely to bring multiple advisers into client relationships as a normal back up, to ensure continuity of service should the primary adviser have an extended absence (planned or unplanned).
Focusing on potential clients is just as important
The best succession plans will also focus on potential clients as well as existing ones. An important example is the next generation, the adult children of your older clients, who stand to inherit some of the wealth your firm manages. As referenced earlier, a study by US publication InvestmentNews reported that 66% of children fire their parents’ financial adviser after they receive an inheritance[10]. Beyond the obvious point that multi-generational practices have added value, doing the right thing by your clients means doing the right thing by their children, and building a relationship with them should form part of a succession plan.
Similarly, consider your sources of new client referrals, and factor them into the succession plans, lest those sources dry up through lack of attention during any transition.
Client centricity means selecting the right parties to succeed you
Whether your succession plans are internally or externally focused, it’s crucial to select potential successors through a customer lens. There are a number of important aspects to this, including:
- culture
- capability
- an appreciation of every interaction that builds the client relationship.
Cultural alignment – your vibe determines your tribe
Long-term client relationships reflect you and your firm, and the prevailing culture. Whether you are a laidback surfer, a technical finance type, or a gregarious deal maker, you exude a vibe and you attract a tribe. For those relationships to survive beyond you means finding an employee or potential buyer who is culturally similar.
The importance of cultural fit has been found to be the first or second most important priority for both buyers and sellers of firms, with 86% of buyers and 74% of sellers nominating it as their single most important decision criterion[11].
Of course, this is more easily said than done. While there are several ways you could look to assess the ‘personality of a firm’ (including whether they are growth or performance focused, their dress code and the way they deal with difficult clients) finding culturally aligned successors is a complex, time-consuming process, and one of the main reasons succession plans should commence years out from a planned sale.
Capability
It’s important that the client perceives no reduction in the service level as a result of the succession, and the capability to continue offering a certain type of advice and a certain type of service is critical, especially if it’s highly specialised and technical (for example SMSF or portfolio construction advice).
In an internal succession scenario, this means bringing in or developing that expertise, which can again be a time-consuming exercise.
Leadership and management capability can be just as important as technical knowledge, and if you are preparing your staff to ultimately take over your business, it’s important to ensure they are capable of stepping up to the plate as a leader and decision maker.
As well as pure technical training, many forward-thinking firms employ a number of external frameworks such as Kolbe Instinctive Strength Assessment, and/or Gallup Clifton StrengthsFinder, to get an understanding of a person’s unique abilities, their ‘internal MO’ and talent themes, so they are aligned with the envisioned role.
Advisers aren’t the only rockstars
In a recent interview[12] with the FPA’s Ben Marshan, David Andrew, from WA advice firm Capital Partners, explained the importance of recognising all the different ‘rockstars’ within an advice practice.
His point, made during a discussion about his own firm’s succession plans, was that there are many different roles that are crucial to the success of running a practice and creating value for the customer. He warned advisers not to fall into the trap of believing the advisers – revenue earners – were the only rockstars in a practice and therefore the only ones who should be considered when offering equity. Operational staff and other non-client facing or revenue generating roles can be equally critical in delivering the client experience and contributing to the firm’s success. They need to be considered when building your succession team.
Conclusion
While many exits from the advice profession can likely be attributed to the one-off impact of new professional standards legislation, the age profile of Australian financial advisers makes a continual and growing number of adviser exits a demographic inevitability. Much commentary around succession planning centres on the lack of formal planning and the harder financial metrics associated with succession (sale price, multiples etc).
But most advisers are uniquely motivated by a desire to build lasting client relationships and help clients achieve their dreams. This desire to do right by their clients means that when transitioning out of a business, optimising the emotional value of client relationships becomes as important as optimising their financial value. In this respect, reframing the succession planning perspective to be more client centric is one that will create more value overall by better serving the interests of clients and employees, and ultimately helping the firm live on in spirit, if not in name.
