“Demography is destiny.” This expression, frequently attributed to French philosopher Auguste Comte, succinctly summarises the inevitability of ageing and all that it brings.
In a financial advice context, where the market landscape is dominated by small firms, and where a significant proportion of advisers are over age 50[1], demography means advisers will continue to exit practices frequently and in significant numbers.
The lack of succession planning among Australian financial advice firms – the vast majority of which have no formal plans in place – is well documented. Most narratives around business succession relate to hard financial metrics, such as multiples, recurring revenues, book sizes, sale prices etc.
As such, the perspective through which many view succession planning is as a tool to maximise the financial value that can be realised upon exit.
But perhaps this perspective needs to be reframed, as there is more at stake than just financial considerations. There is the emotional investment an adviser has made in the firm they built. There is their desire to be fulfilled in retirement. There is the wellbeing of the staff who helped build a business. And, of course, there are the clients.
Most advisers say they are in this profession because they love their clients. They love helping them realise their dreams and they cherish the deep relationships they form with them over time. But what happens to those clients when an adviser exits a firm?
According to Business Health, around two thirds (64%) of clients say they only want to deal with their current adviser and would not be comfortable dealing with any other adviser from that practice[2]. Combine this with data[3] suggesting 66% of people receiving inheritances don’t want to deal with their parents’ adviser and you start to see the beginnings of a major advice disconnect, a disconnect that will only grow as the $3 trillion-dollar intergenerational wealth transfer starts to accelerate.
The point is that we perhaps need to take a more client-centric approach to practice succession planning.
Putting clients (and their children) at the centre of such plans means they can continue to be served and cared for in the way they always have been, and will stay loyal beyond the exit of their advisers.
And happily, this also means advisers can maximise the emotional and financial value they can realise upon their leaving the business they built.
The numbers are bleak
For the principals of many small advice practices, and indeed most small business owners generally, ‘their business is their superannuation’. But paradoxically, a profession based on helping clients plan their futures is surprisingly lacking in enthusiasm when it comes to planning their own.
According to “Business Health’s 2022 Future Ready Report”[4], roughly three quarters (76%) of practices have no written succession plan for their practice, and only 5% have a formal plan for which funding is in place and is regularly reviewed.
A further study[5] reinforced the low priority Australian advisers were giving to succession planning, with only 18% believing succession planning would be critical to their medium-term business success (compared to 53% who said technology).
(Australian advisers can at least take heart from the knowledge that they aren’t alone, one US study[6] found 64% of practices had no formal succession plans).
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[1] https://www.moneymanagement.com.au/news/financial-planning/call-younger-advisers-under-median-age-50
[2] https://www.businesshealth.com.au/dont-wait-til-its-too-late-its-time-for-some-serious-planning/
[3]https://www.investmentnews.com/the-great-wealth-transfer-is-coming-putting-advisers-at-risk-63303
[4] https://www.businesshealth.com.au/future-ready-ix-report/
[5] https://www.ifa.com.au/news/31420-advisers-optimistic-about-growth-prospects
[6] https://franklintempletonprod.widen.net/s/vtkq9rglwf/keys-to-successful-succession-planning-for-rias
