This is the second in a three-part series of articles about succession planning. In the first part, which was published in the Blue Chip Journal in January 2022, I showed that people mean two completely different things when they talk about succession plans – Business Continuity (which I’ll discuss here) and Retirement Planning (which I’ll discuss in part three next month). Unlike retirement plans, all advisers need a proper Continuity Plan – even if you are in your 20s or 30s when retirement feels like it is a lifetime away.
A business continuity plan for a Financial Planner is constructed for the same reason as any other business – to enable the business to continue after a potentially disastrous event. However, unlike businesses in other industries, it is also a legal requirement because the FAIS General Code of Conduct requires every FSP to have a continuity plan.
A continuity plan considers unplanned but foreseeable situations, and it is unique to each business based on its nature and size. For example, you can be certain that every IT company in Silicon Valley, that is situated on the San Andreas fault, has backup data facilities in geologically stable places. You can argue that the smaller the business, the more important it is to have a well thought through and practically implementable plan, because there is simply nobody else to pick up the work should something happen to one of the critical people.
Think about your continuity plan as a will for your business. In the same way that you would always advise your clients to have a will, you should do the same for your business and construct a legally binding document to ensure that your wishes are carried out.
When it comes to professional service providers, especially a small advisory business, the continuity plan is more likely to be focused on critical individuals where the most likely disaster is that one of them suddenly passes away. Because of this, I’m going to focus on the people aspects of your continuity plan, although it is important that you consider all the possible risks to your business, whether they be traditional risks like fire and theft or modern risks like cyber-attacks.
The single most important matter in your continuity plan is selecting the person who will take over your practice if something happens to you. There are several things that you need to consider when making this important decision, such as:
Does the person have capacity to take over your client base?
Do they have an advice philosophy that is similar to yours or are your clients are going to have to forget everything that you’ve told them?
Do they have a preferred solution set that is similar to yours or are they going to move all your clients into different products?
Do they have all the accreditations and contracts with product suppliers that they will need to advise your clients?
While it is not critical, it is practically easier if your successor is in the same FSP. If they are in another FSP, you will need to consider whether they will buy your FSP, your company and/or your practice? This matters because it determines to whom the proceeds will be paid, and that has tax implications.
Have you discussed the implications for your staff? Will they be happy working for your successor? Do they want to move to the new practice or not? Will they relocate or remain in the same office? In most cases, your staff are a big part of your client relationships, which means that your successor may be happy to pay more if they move to the new practice. However, your successor may already have sufficient support staff to absorb your practice, meaning that your support staff will be redundant.
Have you informed your clients who will take over should anything happen to you? This will give your clients peace of mind and it will significantly improve their experience if you pass away. This, in turn, will result in more clients remaining in the practice – and that increases the value.
Have you agreed how the practice will be valued and who will do this? In many cases your beneficiary will be your spouse and it is likely that they will understand much less than your successor. Remember that a seller always thinks that their practice is worth more than the buyer, so it makes sense to involve an independent valuer early in the process. This will manage expectations on both sides and, more importantly, it will help you increase the value of your practice.
In many cases, your spouse might be one of your staff, which gives you the option of putting a different solution onto the table. If they intend to carry on working, it makes sense for them to remain in the practice to ensure the smooth transition of clients to the successor. But instead of doing a valuation and receiving a lump sum, they can get an ongoing annuity of, say, 30% of future revenue. This creates a real win-win-win. It has meaningful cashflow implications for the successor, it improves the client experience, and it extends your spouse’s working life while enabling them to realise the equity that you’ve built in your practice by receiving an annuity for life.
Over and above the items listed above, here are a few more common pitfalls that you should be weary of:
- If you run your practice as a sole proprietor, your FSP will fall away as soon as you die and only your executor will have capacity to act on your behalf (do they understand FAIS?)
- Your successor says that they will take over practice, but they may only cherry-pick a small group of your clients leaving the majority stranded
- Practical matters such you being the only person with the passwords to your client files
In summary, a business continuity plan is a necessity for all planners who care about their clients and want to ensure that their beneficiaries realise the equity in their practice. It is your will for your business, and it needs to be formerly contracted if you want to be sure that it will be implemented. Given that your practice could be one of your more significant assets, it makes sense to get advice from an expert in practice management, so that you can avoid pitfalls like the ones mentioned above.
Guy Holwill is the Chief Executive of Fairbairn Consult. He is a qualified Civil Engineer and Chartered Account and has worked in financial services for more than two decades. Guy is passionate about creating business models that thrive in the changing worlds of regulation and customer experience.
Fairbairn Consult is a firm of Registered Financial Advisers. We are a licensed FSP and a member of the Old Mutual Group.