Financial advisers spend their careers guiding clients on building and preserving their wealth. However, when it comes to their own practices, they don’t often have the time to take a step back and tend to their own “gardens”. While they strive for financial success in everything they do, they must find the time to preserve the legacy they’ve worked so hard to build.
In any business, succession planning goes beyond preparing for retirement to safeguarding the future of the business across many possible eventualities. Without it, the business risks losing momentum, and in the worst case, may even face closure. Having a well-thought-through succession plan can prevent hasty, ill-informed decisions that could compromise the business’s future.
For financial advice practices, the stakes are even higher because it is not just a source of income but a legacy, a safe space for your clients, and a livelihood. Unlike other business owners, financial advisers have the added responsibility of protecting their clients’ interests. If something were to happen unexpectedly, what would become of their clients? Would the practice retain its value? How will this impact their estate planning? Proper succession planning can answer these crucial questions.
Johnny says financial advisers must take note that succession planning is a legal requirement in terms of Section 20 (b) of the General Code of Conduct for authorised FSPs and Representatives. Provision must be made for continued servicing of clients. The purpose of a succession plan is to provide for the contingency of an indisposed Key Individual who can no longer act as a Key Individual, due to death or an event that has led to permanent incapacity or when they decide it is time to retire.
Making sure the advice practice can continue to thrive, even when the Principal of the adviser practice (FSP) is gone, should be a key portion of the business plan for such a practice because so much rides on this beyond the life of the practice owner.
What financial advisers need is a roadmap for the future, identifying who and how they will take over the reins without disrupting clients or diminishing the value of the practice.
For financial advisers considering a succession plan, here are some key considerations:
1. Identifying potential successors
Start by identifying individuals who have the potential to take over the practice. This could be a junior adviser that has been working under supervision for a while, a business partner, or a trusted external party that share your vision, values, and commitment.
2. Preparing potential successors
Once potential successors have been identified, the next step is investing in their development beyond the technical aspects of financial advice. Leadership qualities and client relationship skills are what will enable them to maintain and enhance the existing trust with clients.
3. Protecting the practice’s value
To protect the value of the advice practice as a significant asset, the right structures must be in place. This includes a buy-and-sell agreement, updating all operating agreements, or setting up a trust to manage the transition smoothly. These legal and financial tools can help ensure that the practice can continue to operate effectively, even in the event of sudden and unexpected departure of the practice owner.
4. Communication is key
Your clients and employees have to be made aware of your succession plan. To reassure them that the practice can continue when something happens to the Principal of the FSP can go a long way to maintain their loyalty and confidence. The successor of the practice should also be introduced to clients to ensure a smooth client relationship transition at succession stage.
5. Review and update regularly
Succession planning is not a once-off activity because in a financial advice practice, personal circumstances and industry dynamics change, necessitating a regular review and update of the succession plan to stay relevant.
When it comes to succession planning in a financial advisory practice, Johnny says independent financial advisers could consider looking beyond an individual to a corporate partner with the financial means and depth to offer a secure succession plan in the case of death, disability, or retirement of the FSP Principal.
Correct and proper valuation of the practice and the adviser’s book are critical factors to establish ahead of time and as part of succession planning. Over and above this, as alluded to above, transitioning the clients to the identified successor as part of a proper handover should also be done well ahead of time to ensure a good fit with clients – he says.
While financial advisers continue to guide their clients to financial security, they must make the time to invest the same care and attention into the future of the practice beyond their lifetime because their legacy and their clients depend on it.
Ultimately, as the only way to protect a financial advice practice as a business and set it up for future success, succession is crucial for success in a financial advice practice, and therefore an important tool in any financial adviser’s toolkit.
