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How to manage succession planning in advice firms

Author: Eleanor Becker   Original Publication: CityWire

Posted on 15 Jun 2023

For advisory firm owners, succession planning for the business can be complex and is often forgotten about or put off until they are just about ready to retire.

However, it should be one of the first things on their to-do list when assessing all aspects of business management, Masthead head of corporate accounts Andria Hibbert told Citywire South Africa.

BDO Wealth Advisers chief operating officer Ricardo Teixeira wrote in an article that succession planning involves not just setting out how to transfer ownership, but management too.

It’s about establishing what’s important to the owner, as well as the business’s long-term success.

When planning their retirement, business owners must first establish whether the business forms part of their retirement planning, said Masthead practice management consultant Cedric Baker Effendi. The business owner must also decide at the start of the process whether he/she wants to remain a shareholder, and to what extent they want to be involved during retirement, if at all, he said.

A successful succession plan starts with the stakeholders: the business owner(s), shareholders, executive management, and the family (if it’s a family-owned business), said Teixeira.

Given the relationship dynamics in family-owned businesses, he said it may be best to draft something similar to a family charter, to establish principles on how the business is managed, how business decisions are made and how the family engages with the board of directors.

The plan

Baker Effendi said to consider the following factors when implementing a sustainable succession plan:

Needs analysis – Identify your personal goals and objectives

The professional objective of succession planning is to preserve the continuity of the business; the personal objective is to preserve the owner’s legacy. Thus, the strategy underlying succession plan preparation will likely be influenced by the owner’s personal goals and objectives.

Succession plan – Protect your existing values

A succession plan gives the owner, their successor and stakeholders a guide for the continuity of the business or services, so clients’ financial planning and servicing will be uninterrupted and unaffected during the transfer of ownership or the client book to the successor, said Baker Effendi.

Determine the business value

Baker Effendi said quite a few firm owners misunderstand how much their business is worth, and may expect much higher returns than is reasonable. Valuations in financial services include identifying tangible (future revenue) and intangible (client transferability and retention) business value. Done properly, the business valuation will provide a ‘fair price’ from which the owner and their successor can begin negotiations.

In this Moonstone article, Fairbairn Consult CEO Guy Holwill said owners should value their practices every five years from about age 40, and after each, look at how to boost the firm’s value and implement these changes before the next valuation.

Business plan – Grow potential value

To protect and grow business value, Baker Effendi said advisers should align succession objectives with business objectives. This ensures all efforts within the business – short-, medium-, and long-term – result in increased asset value for the owner, and maximum return on investment for the successor.

Transition plan – Realising business value

A gradual, structured transition will allow the owner to monitor and assess whether their successor is handling clients well or if there’s a risk of losing any clients, said Baker Effendi. If clients are effectively managed and serviced, it provides more confidence that they will remain with the successor when the owner lets go completely.

Hibbert said that from planning stage to owner exit, the succession process should take three to five years.

However, the further ahead an owner plans and the more gradual the transfer of the business or book, the more successful the transition will be for owner, successor and clients, Baker Effendi noted.

Retaining clients

Purchasers of financial planning businesses or client books often find they’re unable to retain the bulk of acquired client relationships long-term, said Hibbert. Among others, this may be due to:

  • High levels of financial adviser dependency;
  • Absence/deficiency of business processes to extend client relationships beyond the primary financial advisor;
  • Clients aren’t informed of the succession plan or given enough information to establish trust in the successor’s suitability for their financial planning needs; and
  • Often too little time is allowed for proper transition, or the handover isn’t thorough enough to properly introduce clients and the successor.

To reduce the risk of client and staff attrition with new leadership Hibbert suggested clear, open communication from leadership with clients and staff, allowing them time to process the change. Also, have service-level agreements with clients and continue the standard operating procedure they’re used to.

Other factors

Lastly, a comprehensive marketing strategy must be developed. Determine the preferred client market, marketing cost and what services would be offered, said Hibbert.

Succession plans should also be continually reviewed to stay relevant. Teixeira said where there is no succession plan, it’s advisable for a business to have key man insurance (or the equivalent), to provide a capital safety net in case a new CEO must be appointed at short notice.


Note: This article was written by Eleanor Becker and originally published on CityWire on 6 June 2023. To access the original article, click here.

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