Advice practices face key person risk

Over 60 per cent of financial advice firms operate with only one principal in charge which presents a number of significant risks, according to consulting firm Business Health. 

Business Health's Future Ready VI Report – released yesterday in conjunction with Rubik Financial – surveyed 328 advice practices and found "principal dependency" to be a key concern among others.

The report reveals that 62 per cent of the practices it surveyed operated with a single principal in charge and of those principals, 43 per cent said they could not operate the business without them.

This was compared to 21 per cent of principals who thought their business would continue to grow and develop without them.

“The remaining 36 per cent reported their practice would continue without them, but would not grow,” the report said.

“This situation clearly represents a risk not only to the practice but also to its clients.

“This is highlighted by the fact that 63 per cent of the clients who have completed the CATScan client survey stated that they ‘would not be comfortable dealing with anyone else from the practice other than their current adviser’,” it said.

Business Health also said it is surprising that given the number of practices that operate with a sole principal that 48 per cent do not have a “key person plan in place”.

“These results, when coupled with the aging population of advisers, highlight the dependence of many businesses on the principal,” the report said.

“Should the adviser die, be disabled or leave for some reason, the question must be asked, what happens to the client? 

“All businesses need to be able to answer this question with conviction but it seems likely that this would be impossible for many, given the results of this analysis,” it said.

The report also found while there has been a slight improvement in the number of businesses implementing a succession plan 61 per cent of businesses still do not.

“A total of 39 per cent of practices have a clearly documented succession plan or buy/sell agreement – this represents a 10 per cent improvement on the 29 per cent result from 2012,” the report said.

However only 50 per cent of the firms with a succession plan in place have actually identified a successor who has agreed to the plan.

“A total of 16 per cent have identified a successor but do not have a formal agreement in place, and the remaining 34 per cent of business owners still do not know who will succeed them in their practice,” the report said.

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