Succession planning for independent financial advisor (IFA) firms is a hot topic of debate within the industry. Besides issues such as which succession model is the best and how to value an IFA firm, when and how advisors practically retire is another key piece of the succession puzzle. Many well-intentioned succession plans experience strain because the selling advisor wants to continue working after their planned retirement date, whereas the buyer would like to see them retire.
Data from the Ninety One Investment Platform reveals that most advisors are active in a practice up to at least age 65, maintaining a sizeable client load. Furthermore, a significant proportion of advisors continue working beyond age 65. It is only at age 75 that most advisors appear to give up practicing.
Source: Ninety One Investment Platform
Having a shared understanding between a buyer and a seller on when an advisor will retire (as opposed to when they think they will retire) is a key input into a succession plan. Most succession plans should allow for the selling advisor to work until age 65. If we follow the data, there is a strong chance that a selling advisor will continue working beyond age 65, albeit with a reduced client load.
Succession plans often fail because the founding advisor did not provide for their retirement
It might seem strange that a financial planner neglects their retirement plan, but it happens frequently. Quite often, a founder advisor ends up at age 60 with limited financial provision outside of their advice practice.
These succession plans are notoriously tricky to pull off as the selling advisor needs a very high valuation on the deal to fund their retirement. This has been the experience of several advisors looking to sell their firms to fund their retirement. We estimate that an advisor can only replace 50% of the earnings from running their advice practice if they sell the practice for cash and live off the proceeds.[1] Normally, this is not enough, and advisors in this position are often forced to continue working for the buying firm after the acquisition. This has big implications for the buyer.
Don’t neglect the “softer” issues
Focusing too much on valuation distracts firms from negotiating other important issues that can have far-reaching implications after implementing a succession plan. In our experience, an advisor considering selling their practice for succession purposes should:
- Spend time during the initial negotiation to agree on how a potential “divorce” will happen, should the deal fail for any reason. Ensure that this is documented in the sale agreement.
- Investigate the operational/technology infrastructure implications of the sale and the disruption it will cause to your clients and staff.
- Be clear about the employment future of your existing staff and what happens to them after the sale.
- If you have never worked for a large corporation before and are considering selling to one, obtain as much information as possible about the cultural differences and how they might affect your staff and clients. Speak to other advisors who moved from running their own business to working for a larger corporation.
- Be clear about the investment philosophy/process and the client fee strategy of the buyer and how this will impact your clients.
- Make sure you have a full understanding of the strategic focus of the buyer post the transaction – what is the balance between growing new business and assets under management on the one side, and client service and relationships on the other?
A successful succession requires structured planning and negotiation – and most importantly, an advisor needs to devote sufficient time to navigate this multi-layered process prudently.
