Succession planning is a significant factor of success and growth for financial service providers (FSPs). However, there are some important considerations to ensure your planning ultimately leads to success.
Succession planning is a strategy to pass on leadership roles, and often the ownership of an FSP, to identified successors. These may be one or more persons, an organisation and/or family members. Also known as replacement planning, succession planning ensures your business will continue to run smoothly after you or your most important employees move on to new opportunities, retire, become disabled or pass away.
Besides ensuring business continuity and leaving a legacy of goodwill and professionalism, appointing a successor also ensures your clients’ needs will be met throughout their lifetime. In this way you can fulfil your moral obligation to your clients.
Succession planning should form part of your FSP’s retirement planning. This is because it involves selling the business to another FSP, or creating a development path for family or an opportunity for employees to buy into the business once you retire. It is therefore a liquidity event, enabling the transfer of ownership in a going concern – your business – to an external party and/or rising employees.
Each FSP’s situation is unique, so your succession plan should be personalised. Be sure to re-evaluate and regularly update it in response to changes in the FSP to ensure it remains up to date.
In addition to creating a succession plan for anticipated or planned changes in leadership, also consider drafting an emergency succession plan. This would apply if a key individual must unexpectedly be replaced, for example if he or she passed away.
Succession plans and business continuity plans
A succession plan must not be confused with a business continuity or business contingency plan, which is prescribed by Section 37(2)(e) of Board Notice 194 of 2017. A business continuity plan aims to limit losses, preserve essential data and functions, and maintain regular activities if the FSP’s systems and procedures are interrupted.
Furthermore, a business continuity plan sets out the measures and steps to timeously recover such data and functions and resume the FSP’s activities.
FSPs should maintain both a succession plan and a business continuity plan. These may be combined in one document.
Identifying a successor
The ultimate success of a succession plan lies in thorough, detailed planning, which takes both personal and business goals and a profile of the ideal successor into account. This seeks to ensure the successor is a good match for your client profiles.
When searching for successors, determine if your potential candidates meet the fit and proper requirements of the FAIS Act in terms of qualifications, regulatory examinations and management and product experience.
Also check if they:
- are licenced to provide advice on the products you offer;
- provide the same services for all the product categories you offer;
- have the same or easily transferable CRM systems;
- have staff to handle extra work;
- have documented operational processes;
- possess the required knowledge and skills;
- provide good quality financial advice;
- reflect the correct personal attributes.
To identify potential successors from within your business, evaluate each leader’s skills. The identified employees then need to be cross-trained, so they develop skills, FSP knowledge and a holistic understanding of the FSP. In this way, they will be prepared to take over when the time comes.
Quantitative and qualitative aspects
Another key step in succession planning is to assess the quantitative (financial) and qualitative (non-financial) aspects that can impact business value. The main focus is the stickiness of your client base, which indicates the probability of your clients staying with the business when someone buys it. Clients are more likely to remain with a business if there is a proper hand-over to a successor and they are assured they will receive similar ongoing service.
Also consider if the legal structure of your FSP permits succession. Sole proprietors who would like their business to continue operating after exiting will need to convert their FSP into a separate legal entity, such as a private company. If this is not done at the time of exit, the sole proprietorship will cease to exist and the FSP licence will lapse.
Succession planning and regulation
Succession planning is not clearly set out as a regulatory requirement however, the Financial Sector Conduct Authority (FSCA) monitors whether FSPs have taken steps towards business succession planning. A frequently asked question in compliance reports is:
‘’Does the FSP have procedures in place to ensure that it complies with section 8(4)(b) of the FAIS Act in the case of replacement of key individuals?‘’
The FSCA also confirmed that clients and product providers must be notified when a key individual dies. This also applies to FSPs where no successor has been identified, including sole proprietors or ‘one-man-shows’.
The executor of the estate, or family members if there is no internal contact person, are expected to fulfil this duty or find an individual to assume the role of key individual to do it. This often results in an individual being appointed whom the clients do not value as highly as the previous key individual.
Considering that somebody will be carrying out this duty, consider:
- How will the person know who the clients are and which product providers need to be notified?
- Are your clients’ and product providers’ contact details readily available?
- Is there a formal notification or template already drawn up that can easily be sent to clients?
- What will happen to the client files once the FSP is no longer operational?
In light of these questions, it is important to keep a record of these details. This can include lists of clients and relevant product providers with their contact details. These lists should be readily available to the person elected to carry out this duty.
You can also draw up a formal notification letter in advance to reassure clients where there is an identified successor. If you have not identified a successor, you can draft a similar notification to assist the executor, which informs clients that they should seek a new financial advisor.
Even when there is an identified successor, you will also need to consider the transfer of client records. These records may then need to be disposed of appropriately.
Succession planning ultimately seeks to ensure that changes in FSPs, specifically the replacement of key individuals, does not prejudice the interest of clients or lead to any unauthorised or unconcluded business.
Including your succession plan in your will and last testament will clarify for the executor in his or her administration of the deceased estate your wishes for your business, and prevent any confusion among beneficiaries and/or heirs. It will ensure the legacy you worked hard to build continues to exist, your family has provision and your clients have someone to see their financial plans come to fruition.
Masthead can assist you to draft or update your succession plan. Please contact your Masthead Compliance Officer or get in touch with us for details.