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By Jaco van Tonder, Advisor Services Director

In previous publications over the past year we have discussed the extent to which independent financial advisors (IFAs) all over the world are increasingly debating very similar issues. Many advisors would no doubt be aware of the following discussions:

  • Moving from product commissions to customer agreed advice fees - pursued under the Retail Distribution Review (RDR) reforms in the UK and South Africa, and under the Future of Financial Advice (FOFA) reforms in Australia.
  • The need to manage conflicts of interest that can arise between client needs and the interests of an advisor business - dealt with under the Financial Advisory and Intermediary Services (FAIS) locally, FOFA reforms in Australia and most recently the Fiduciary Rule in the United States.
  • How robo-advice was touted to be a serious threat to financial advisors, only to emerge instead as an asset to help financial advisers serve smaller clients.
  • How the aggressive focus on costs of advice and financial products often leads to commentators underestimating the long term value of advice to consumers. Various research reports now estimate appropriate financial advice to be worth between 2-3% per annum.

Perhaps one should not have been surprised then by a recent blog post by Heather Hopkins from Platforum, a UK-based platform and advice market research unit, about how succession planning remains one of the biggest obstacles facing IFA practices in the UK. The full article, titled “The adviser’s succession dilemma” can be accessed under the blog section of the Platforum website at www.platforum.co.uk.

A growing advisor conversation

Similar to the experience detailed in the Platforum blog, the topic of advisor succession planning has featured in a number of IFA presentations and discussions we have facilitated at Investec Asset Management over the past year.

It seems that a significant number of South African financial advisors in their fifties and older have no formal plan in place to enable them to retire from their advice business one day. On top of this, most financial advisors have not built a separate retirement savings pot outside of their financial advice practice. By default then, the IFA business is the advisor’s retirement plan.

High level succession options

In many of our discussions with advisors on the topic of succession, it is clear that cashflow requirements of primary business owners, as well as the time to implement the plan drive the succession options considered. In this regard advisors looking for a succession plan often find themselves facing the following broad options:

  1. They bring on board younger advisors who will one day take over the practice. Looking at practical experience with this option, it requires around ten years to get to the point where the primary advisor can exit. This option places a cashflow strain on the advice business, as younger advisors typically do not have access to capital to buy out the primary partner at market related valuations. The culture however, and ethos of the adviser firm, is largely preserved.
  2. A merger with, or take-over by, a similar-minded advisor business looking to grow their distribution footprint. This option can be implemented over a shorter time-frame, but still needs up to five years to allow the primary advisor to exit the business. Merging two profitable advisor practices places less financial strain on both firms. The larger combined business will make it easier to facilitate the transition of ownership from one partner to the other.
  3. Sell the advice business to an advisor consolidator (typically a product manufacturing firm looking to grow their influence in distribution). This option requires very little time to implement. It normally takes the form of the advisor signing over clients to the consolidator, and being paid a capital lump sum over a period of three to five years in exchange. Thereafter, the advisor can choose to continue working at the new practice as an advisor, or retire on the pay-out he or she received.
  4. A blend of options two and three mentioned above.

Each of these options has its own benefits and implementation risks, which advisors should consider very clearly. It often helps to talk to other advisors who have been through similar succession options to the one you are considering to avoid hidden surprises.

In the case of the UK IFA experience outlined in the Platforum article, many IFA firms have chosen to sell to a consolidator since the advent of RDR regulations in that market. The merits of selling to a consolidator is now being debated intensely in the UK advisor community, as some consolidators there are increasingly requiring that clients be transferred to a preferred or in-house platform and investment proposition. This change has caught many advisor firms by surprise, resulting in a fiery debate about the true “independence” of advisors in UK consolidator networks.

Time to implement succession plan

The debate about which succession option is best for an IFA firm will continue, and there is obviously no right or wrong answer. However, what stands out most clearly to us, is how many succession options require between five and ten years to implement successfully. IFAs who leave their succession planning for later stages typically find that they are left with fewer succession options, and they are often forced to sell their businesses to cash buyers in order to retire.

For advisors looking to retire from the business they spent most of their career building, leaving their clients in good hands, it pays to plan ahead.

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