Johann Maree, principle member and practice management specialist
at the Institute of Practice Management wonders what you would do if a client asked you for a written plan of succession that they could follow should you die or became disabled?
Would you be in a position to give them a documented answer?
Over the last few weeks financial advisers have asked a lot of questions about how to develop succession plans for their practices. Some of the advisers have realised that if they died or became disabled, their clients would not know where to turn for a new adviser who would continue the financial plans that had been developed for them by you?
There is no doubt that creating a written plan of succession for clients may increase your clients comfort level and address unspoken concerns. If your clients have begun asking you about your succession plans you need to pay serious attention to their questions.
The purpose of exit planning is for financial advisers to achieve their financial and lifestyle objectives after they leave their practices.
One of the fundamental objectives that must be decided early in the exit planning process is - selecting a successor. International trends have indicated that the majority of owners of smaller-sized practices prefer to transfer the practice to other family members, an employee or even a co-owner.
Only a small percent of these practice owners wanted to sell their practice to an outside third party. Unfortunately for financial advisers, the people they first identify as their successors often do not end up as the ultimate owners.
Much effort is wasted focusing on the wrong successor target or, worse yet, when financial advisers wrongly assume a child or employee wishes to own the practice, they typically don not take into account alternative plans.
Maybe we all should be thinking about providing a succession plan as a standard part of our service. How many clients and prospects have this concern in the back of their minds but never bring it up?
Is there a clear path of migration to another financial adviser? Can another financial adviser or the practice pick up where you left the client? How will each clients experience be different with another financial adviser? What should the clients first action steps be when you have passed on? Is there something about your client service that is completely unique? What are the components of that service? If those components cannot be found in one place, can they be found in with several other advisers? These are questions that you may find worth your while asking and also finding answers that could be shared with your clients.
It may result in increasing clients comfort levels and at the same time demonstrate that you are really concerned with the welfare of all your clients.
Most financial advisers are quite good at assessing the retirement needs of their clients and making sure they have a clear path to get there. However they are not that good at planning their own careers.
When financial advisers finally decide to hang up their application forms and their clients financial plans as well as all the goodwill they have built up over the years, they encounter one of the following options; an outright offer to purchase their practice, transition their practice through a merger or become involved in a phased succession buy out agreement; or failing these two options, living off a steadily shrinking client base.
Many financial advisers in their fifties and sixties will soon be ready to take cash out of their business (regulatory pressures and the costs involved of continuing), reduce their level of control, pass ownership on to fellow partners and employees, or simply retire and go fishing.
It may be interesting to note that research done by The Institute of Practice Management amongst South African financial advisers indicate that over 50% of our advisers will be over the age of 60 by 2010 and over 80% of them do not have succession plans in place. Clearly we have some challenging times ahead!
Those that are fortunate have put in place documented succession plans and have also established a clear value to their practice. These advisers have a choice of being acquired by another financial adviser or a company or alternatively they go the route of a succession buy-out plan; the rest of these practice owners are limited to a transition buyout (at a bargain price to the buyer) or a slow and painful death.
There are good reasons why hard working financial advisers find themselves with an all-consuming job and very little equity in their practices. Many have copied tried and tested methods of running a practice in a similar manner as they’re seemingly successful mentors used to.
Instead, what should have been done is to create, at the outset, a written business plan outlining strategies designed to meet the financial advisers own specific objectives. Thereafter, one has to work on the premise that it will take years to create the right conditions in order to sell the practice to the right buyer. It is true to say that doing things the same way as they have been done in the past, will, going into the future, result in the same outcome, a transition buyout or slow death.
There are a number of things that financial advisers can do to make their business marketable. Even if there is no intention to sell, advisers are urged to prepare as though they will sell in the future. Stephen Covey writes that all preparation should begin with the end in mind.
In the financial adviser instance it must be retirement. This requires careful thought and preparation, it is necessary to begin by knowing what one wants to be and how one will get there. An infrastructure will need to be created that allows you to focus on building client relationships that move the client relationship from you as the adviser, to the practice itself.
Building value in a practice as mentioned earlier does not happen overnight. It takes thought, analysis, planning and focused execution. The right to choose between one or more exit strategies is rarely the result of a spontaneous reaction, but rather the combined effects of sound decisions made every day over the life of your practice.
The question you need to ask yourself is can you sell your practice? Below are some questions that you can ask yourself in determining where you are in preparing your practice for a transition:
o Do you have a reliable method for benchmarking the current value of your practice?
o Who would you sell your practice to?
o How would you transition out of your practice?
o When do you plan this transition for?
o What does your practice need to look like to allow the transition to occur?
o Do you generate an annuity stream income?
o What systems are in place that will give the practice value?
o What are you doing in your practice to enhance that value?
o Have you prepared your staff for a change in ownership?
o How would your clients react to you transitioning out of your practice?
o Who needs to be involved in making the necessary changes? How?
To get the best possible price for your practice, you are urged to begin considering carefully your answers to the above questions. The most desirable practices may fetch between three and six times their gross income. Those that do not meet the grade will be lucky to walk away with a quarter of their anticipated price. In the end it will come down to developing the right processes and systems that will allow for the ability to transition out of your practice, retire right and leave your practice behind.