The succession questions

It is never too soon for financial advice practice principals to start implementing a formal succession plan.

Principals of financial planning businesses who are deciding to retire face many questions. After many years building a business, who will manage the ongoing affairs of clients? What about staff who are years from retirement, unlike the principal? What are their expectations? Are key staff secured in the business with contracts including equity? Is the business “fit for sale”? Have prospective successors been identified? Is the business “principal dependent”? Can a successor deliver the same level of service, such as direct share advice, as has been provided for clients?   

If these questions can be answered easily, then it will not be as big a challenge to retire successfully. If, however, these issues, along with other key factors such as tax and legal, are yet to be addressed fully, then retirement is something only to wish for. It could well take two-three years, or more, to get the business “fit for sale”, particularly if there is a long tail of clients that have remained with the business, but may only account for less than 20 per cent of the total revenue. These clients will not always be appealing to a prospective buyer, so it will be best to divest these clients prior to selling the whole business. This itself takes time.

In this age of platforms and IMAs, prospective successors will be more interested in a business that is efficient in how clients are managed, and will be looking for a business that can be easily merged into theirs. Having a larger focus on direct shares could also limit the number of options as to who may be interested in taking over the business, as this requires additional time to manage compared to a business with greater focus on managed funds. A successful principal may have strong claims to be an “asset allocator”, but finding others with the same expertise may be hard.

A prospective successor will want to be able to provide a similar service to your clients, thus ensuring they are retained into the future. This includes having a similar investment philosophy so clients will be comfortable with the approach by the successor in managing their investments.  

Contribution of staff to the business


As a principal, ask yourself the question, “How successful would I have been without the support of key staff?” Importantly, what value do your clients place on your staff? Planning for your succession is a critical process, and it is essential that key staff have buy-in with the process, thus ensuring any doubts are removed about their future in the business. Unlike you, they may well have plans to keep working for some years.

A succession plan needs to deliver good outcomes for all parties, being shareholders, clients and staff. This ensures that the business will continue to provide a high standard of service to clients, and remain successful into the future. Having worked on building the business over many years, principals will be keen to ensure there is a lasting legacy for others to benefit from.

Another important issue that can impact on a succession plan being implemented is “principal dependency”. In many cases this could have a potential detrimental impact on the transition of the business. It can be avoided where key staff have shared responsibilities along with the principal in the day-to-day running of the business. Principals should ask themselves the question, “Can I take extended time off from running the business, and it continues to run efficiently?” If the answer is “no”, you have a problem.

If "yes", at an agreed time the principal retires from the business, with new owners assuming control, it will be a smooth transition for both clients and staff, as the principal steps back from running the business without any impact to the on-going running of the business. It will also be satisfying for the retiring principal to know that the transition to a new owner has been successful given many clients remain friends in the local community. 

When is a good time to start considering a succession plan?

The reality is that many advice businesses do not have a documented and funded succession plan in place. Apart from the obvious benefits in having such a plan, in the event of unforeseen circumstances, there are other benefits to the business. This includes ensuring all staff are on the same journey, and where appropriate also have equity in the business. It also enables other shareholders to progressively buy the principal out over time. This is more preferable than asking a younger adviser to fund a majority buy-out, which may be prohibitive for them. It could well be that an external successor will need to be identified.

Principals do not always appreciate the benefits of spending time on developing their succession plan, believing that it can be adequately addressed at a later date. What they don’t realise is that it is something that cannot be done overnight, especially when giving consideration to tax and legal issues. Why would a principal, who has worked hard over 20+ years in building a planning business, not allocate time to address this key issue? The fact is that succession issues need to be addressed well in advance of retiring, preferably when setting up the business and when key staff join the business.

In addition to this, there are more legislative issues to address, including higher education standards that the advice industry is having to face. Older principals may need to address their succession options earlier than expected, whether they like it or not!

Legal and tax implications

Legal and tax implications also need to be addressed sooner rather than later when it comes to succession planning. It is very difficult, and costly, to change business structures if necessary, so best to get the right advice from the outset. With the complexities of the advice industry and changing legislation, principals should seek advice that experts in this area can provide. This is legal advice that most suburban law firms will not be as familiar with.

Surprisingly, in what is a mature industry, many principals have not addressed their exit strategy fully, and don’t realise what the implications are for their business, including clients and staff. Some would argue that they have a buyer of last resort, if they are lucky, as their succession plan. But in reality it is not comparable with a fully documented and funded succession plan that  provides benefits, and certainty, for all parties – principal, shareholders, staff and clients. 

Principals need to be in control of their destiny, and not dictated to by factors outside their control. By having a succession plan that addresses all the key issues, they can be assured of an orderly transition of the business to their chosen successor, at the same time realising full value for their hard work over many years.

Peter Fysh is principal of Financial Planning & Succession Pty Ltd

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