Veteran advisors planning to pass the torch must chart a gradual and deliberate path to succession
The end of the year tends to be an apt time for people to step back, take stock, and reflect on their long-term priorities. And as the industry turns the page on a particularly disruptive 2020, the compulsion among advisors to chart the future direction of their business should be stronger than ever.
“I would say that we should be looking forward, not backwards, because we're not going to be going back to the way it was,” John Novachis, executive vice president for Corporate Development at Investment Planning Counsel, told Wealth Professional. “The demand for advice has never been stronger as we were deemed an essential service through the lockdown.”
Faced with the clear and present danger from the COVID-19 pandemic, more Canadians than ever are seeing the importance of big-picture thinking: emergency savings, life insurance, and estate planning have surely been bumped up the holistic-planning totem pole. At the same time, the shocks to their own practices have made advisors more aware of the need to brace for business risk – and that means working on a solid succession plan.
“You need to start with the end in mind, and focus on the areas that matter most,” Novachis said. “The first part of that is making sure clients will be looked after, and making sure the legacy that’s been built through the practice will be preserved.”
Another priority area related to that is to build and preserve a great team of professionals, who would cater to clients’ needs and provide a top-tier experience. In a post-pandemic world, that will include delivering advice in the way clients expect it, whether it’s in person, by phone, via video, or through other channels.
“In the new digital world, many of the inconvenience factors associated with traditional client review meetings have been taken away,” Novachis said. “Advice has become much, much more accessible than before, which is contributing to clients’ appetite for it … We’ve climbed up the steepest curve ever when it comes to technology adoption, and I would encourage advisors to embrace it now more than ever.”
Having a reliable team of professionals, he added, would offer advantages for business continuity; even without the advisor-owner at the wheel, the practice should still be able to serve clients’ needs. Longer-term, it would allow for a turnkey operation that can be more easily transferred to a successor or buyer when the advisor-owner retires.
The final area of concern in succession planning, Novachis said, would be the value of a business. From a quantitative standpoint, a reliable history of revenues can provide a useful metric, to which the owner should be able to apply a fair-market multiple. Ideally, they should be able to demonstrate why the business valuation should be placed at the higher end of the multiple.
“Do clients have documented financial plans? Are there good customer notes and client files that can easily be transitioned? Is there a strong compliance history?” he said. “If you can demonstrate a strong and consistent revenue history, and line that up with details showing the business runs very well, you’ll have a very defensible valuation of the book of business for a successor to consider.”
The successor selection process must start sooner rather than later, especially given the checklist of desirable characteristics. While competency and credentials are important, Novachis stressed that passion and entrepreneurial drive are table stakes for anyone next in line, particularly if they’re looking to take over an independent advisory practice.
An often-overlooked aspect, he said, involves the successor’s ability to pay for the business. If they’re not well-capitalized, the seller may end up shouldering an outsized amount of risk in the transaction, hoping that the successor advisor can come through. That concern goes beyond the question of “will the advisor’s check clear?” but also whether they’ll have enough skin in the game to stay passionate about the business over the long run.
“Sometimes gifting works, but it's not always the right answer,” Novachis said, referring to practices passed down to adult children following in the founder’s footsteps. “Are the kids ready for that ownership? Do they have all the qualities required? Or are they perhaps falling short in terms of passion or emotional investment?”
Novachis cited independent research by Tom Deans, a PhD holder and intergenerational expert, who found that among businesses that’s simply gifted by the founder to the second generation, only three per cent are subsequently transferred to the third. The message for senior advisors, therefore, is that simply handing over the keys to the practice is likely not the best way to ensure its survival into the next century.
Aside from successor selection, transferring client relationships should also be approached with care. Rather than being executed as a surprise announcement – “no client wants to hear that they’ve been sold,” Novachis noted – the process should be done methodically over a reasonable period.
“You might start of with some of your smaller clients, or some who are maybe much more comfortable with a form of transition,” he said. “You don’t want to start off with all your biggest clients first.”
Transparency is paramount in these transitions, which should follow a disciplined process of introductions. The exiting advisor-owner should be open with their clients, letting them know that a transition is taking place and facilitating fit meetings between the clients and the incoming successor. From there, the successor should be given increasing responsibility over clients’ affairs, while the senior advisor shifts into a steward role; the ideal endpoint would be for the clients to confirm that they’re comfortable with the new arrangement.
But as Novachis explained, not all clients will be on board. Even with the most deliberate handovers, he said senior advisors should anticipate some natural level of attrition. In relation to that, they should consider including an appropriate retention clause within their buy-sell agreements, setting a threshold attrition rate beyond which the purchase price can be negotiated.
“The key is to set up a transaction that will be win-win for the clients, for the seller, and for the buyer,” Novachis said. “A very defensible transaction is one that pays a good price, and also protects the interests of all stakeholders involved.”
