SuccessionJun 1 2017

The need for succession planning

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The need for succession planning

Advisers are used to helping their clients put plans in place for every stage of their life but it is just as important for adviser firms to consider their succession planning options.

Any business should know what will happen in the event of the business owner retiring, being unable to work or in the event they die suddenly.

It can be a difficult subject to broach, or even think about as the owner of an adviser firm, but there are benefits to doing so.

Barry Neilson, business development director at Nucleus, says: “The act of succession planning is simply an extension of the normal business planning process and therefore not rocket science. 

“But while it might be straightforward, it shouldn’t be left until the last minute.”

Failing to plan

Adviser platform Nucleus published a guide to exit planning for advisers in March this year, having found it had become a “hot topic” over the last few years due to rising FCA bills, the increased burden of regulation, the influx of provider-owned advice and the number of advisers hitting retirement over the next few years rising.

A study by Investec Wealth and Investment (IW&I) among 101 intermediaries reveals 36 per cent of those who own all or part of their firms plan to semi-retire or take full retirement in the next decade. 

That just 12 per cent of advisers have fully agreed a succession plan underlines how complicated the process can be and in many instances the outcome only becomes clear when full retirement beckons.Mark Stevens

Its research suggests those retirement plans mean there will be a significant change to business ownership, with 49 per cent of advisers planning to sell their firm entirely on retirement and 30 per cent likely to recruit a successor from outside the business. 

Some 21 per cent of advisers believe their successor will come from their existing team, according to IW&I, and only 12 per cent expect family members to take over the business.

“While IFAs have to be experts in retirement planning, it doesn’t follow that they will have all the answers to their own situation. 

“That just 12 per cent of advisers have fully agreed a succession plan underlines how complicated the process can be and in many instances the outcome only becomes clear when full retirement beckons,” points out Mark Stevens, head of intermediary services at IW&I.

Nucleus conducted its own poll of 200 adviser firms for its guide to succession planning and discovered the following among those thinking about long-term succession planning:

  • 40 per cent would anticipate selling to another advisory firm.
  • 30 per cent would expect to sell internally, to a family member or through a management buyout.
  • 13 per cent would sell the business to a consolidator.
  • Less than 2 per cent would sell to a provider.

Plenty of time

But Mr Neilson urges firms to look at their exit planning options as far ahead as possible.

“Many elements of a robust succession plan come to fruition over time and require long-term resource commitments, so the longer advisers wait, the fewer options they may have,” he reasons.

“Success requires owners to start planning as soon as possible, to get behind the headlines and relentless emails promising great riches and to unpack what they have and what’s actually possible.”

A good succession plan is not just about the business owner, of course, there are plenty of other people with a stake in a firm or who have interests in seeing the best possible course of action taken.

Mr Neilson adds: “The challenge of succession is to satisfy the leadership and longevity issues of the firm while addressing the entirely reasonable financial interests of the founder, while protecting staff, ensuring continuity for clients and minimising disruption and risk – a tricky balancing act.”

An important aspect of succession planning is understanding how a business’ employees see themselves progressing. 

If they show any desire to move up the ranks and take over the firm, then it is useful for the owner to know about it.

Similarly, if another senior person in the organisation plans to retire around the same time as the owner of the adviser firm, there will certainly need to be a plan in place for both departures.

One of the things that’s really important to us is that we understand the career routes and ambitions our people have. For us that helps us to then identify whether or not there are potential routes for succession and future roles for people.Marie Calvin

Fiona Treadwell, talent and development business partner at Mattioli Woods, suggests for quality staff to be engaged, they need to see the options for their career path clearly and be on a plan to attain their goal.

“An individual can’t be held back simply because they are doing a sterling job in their current function which no one else can do. It’s extreme folly to try to hold onto someone who is aspiring to progress. If restricted, they would simply end up leaving the organisation anyway,” she argues.

“Much better to plan for an individual’s progression, cyclically investing in entry level recruits to train and learn the ropes and progress, so an employer never has that dreaded feeling of not knowing how a function can be resourced when a ‘key’ person moves on.”

She adds: “Some might view such a programme as less than lean or inefficient but short-term should never be a consideration in financial planning just as it should never be in business.”

Routes for succession

Marie Calvin, national academy manager at Standard Life's advice firm 1825, agrees establishing the ambitions of its existing employees is part of the succession planning process.

“One of the things that’s really important to us is that we understand the career routes and ambitions our people have. For us that helps us to then identify whether or not there are potential routes for succession and future roles for people,” she says.

“From our point of view it’s understanding what career routes people want to consider, identifying what their current skill sets are, where any gaps potentially are to get them towards that role, and then offering development support, guidance or potentially training to help them to get there, so they’re in a really great position to apply for a future role when it comes up,” Ms Calvin comments.

Once the sale process starts, particularly if it’s to an external buyer, advisers will want to have as much space and time as possible, as decisions come thick and fast and it can be exhausting.Rob Stevenson

But how can an adviser firm decide between an internal succession or external sale?

It seems like it should be the most important decision the owner takes.

Rob Stevenson, co-author of the Nucleus paper on exit planning and director of Kingmakers, believes advisers may actually be able to keep their options open here. 

He explains: “Once the sale process starts, particularly if it’s to an external buyer, advisers will want to have as much space and time as possible, as decisions come thick and fast and it can be exhausting.

“There are many ways to enhance enterprise value before and during the planning process and just as many ways to give value away by not structuring a deal properly. 

“Finding the right fit is ultimately key to extracting the maximum value over the entire timeline of the transaction, while balancing the requirements of all the other stakeholders of the business. It’s also important for their legacy.”

eleanor.duncan@ft.com