IPC Securities' President outlines the paths to succession his firm has built for advisors staring down their own retirement
John Novachis sees the industry staring down a $400 billion problem. The President of IPC Securities is looking at the same demographic data as the rest of us, and applying it to the Canadian advisory space. Taking the mutual fund industry as an example, Novachis sees a roughly $2 trillion market in Canada. 40 per cent of that total market is represented by the independent channel, amounting to roughly $800 million in assets. Using his own firm as a sample of the general advisor population, he sees about half of those assets being managed by advisors at or approaching retirement age. The amount, therefore, of assets that may be transferred or left unmanaged is around $400 billion, a potentially massive problem for clients and the wealth management industry.
The problem, Novachis explains, is that there is not a huge wave of talent coming up behind these senior advisors. The barriers to entry in this industry are high and young advisors aren’t often given conventional means of capitalization, making it hard to purchase a book of business. Entrepreneurial young advisors are left with potentially risky choices. Retiring advisors are left with fewer buyers at a time when so many of them are looking to offload their books.
“Less than ten per cent of advisors have a documented succession plan. Probably 20 to 25 per cent say they have one but the true test is if it’s actually documented,” Novachis says, citing IPC’s own research. “We do great planning work for our clients, why aren’t we doing the same for our businesses?”
Novachis says that this succession issue could leave many clients and assets unserved. It’s crucial, he argues, for advisors to take steps to address the prospect of their own retirements with clients. At the same time, he says its on firms like this to innovate new ways to facilitate succession for advisors and ensure their clients remain well taken care of.
IPC has created a formalized process to facilitate succession. Call their pinnacle program, IPC can operate as a strategic buyer of advisory practices, working with the advisor to select a successor. Novachis explains that their pinnacle program involves multiple succession paths for advisors. The first, and most conventional path, involves the advisor selling their book, working with IPC to select a successor, and transitioning those client relationships. That, in many ways, follows the conventional path of succession with IPC functioning as the facilitator.
The second path Novachis explains may suit the wider trend towards a gradual retirement. For advisors who do not want to sell their practice wholesale, IPC is able to set up a phased succession plan where tranches of the book are handed over to an IPC employee advisor. This allows for monetization while the advisor retains some of their work, allowing for a more gradual shift.
The final path offered by IPC is called pinnacle growth. Under this plan an advisor would monetize their business, with IPC paying them for their enterprise value, but the advisor would continue to serve their clients and function as their advisor. The advisor would then be working under the IPC umbrella, with a mechanism to participate in the future growth of their business, while offloading some of the administrative tasks and concerns about succession that might plague an independent.
While IPC has come up with these three distinct succession paths, Novachis says that may not be the end of their menu. His team is still working up new ways to facilitate succession for advisors and help address this looming issue. Despite the dearth of younger advisors, Novachis says that it’s still a seller’s market for advisor books and the supply has not yet reached a critical mass. That is changing, however, and Novachis argues that the more advisors we see retiring the more a book’s value may drop simply as a product of supply and demand. That’s why he believes advisors need to look closely at their succession plans and consider how they wan their business to continue beyond their own work.
“I think the best business is one that can operate without the business owner. That's when you really, truly have a business, versus a practice. In a dental practice, for example, if the dentist isn’t there then there's no business. The best value is determined when the business acquired is the ideal business a buyer wants to acquire.”
