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Planners not great at their own planning

Financial planners might be in the business of planning but generally it’s for other people, not themselves. When it comes to succession planning many, it seems, are like cobblers’ children.

Thursday, November 15th 2001, 9:25PM

Financial planners might be in the business of planning but generally it’s for other people, not themselves. When it comes to succession planning many, it seems, are like cobblers’ children.

Though retirement is not far away for many advisers, they are often too busy running their businesses to think about how they will get out of it when the time comes.

Paul O’Brien, the new president of the Financial Planners and Insurance Advisers Association noted in a recent interview with Good Returns, that many advisers have no succession plan in place and will find it difficult to sell their businesses at a realistic price.

"There’s definitely a shortage of people in their 30s and 40s that have the ability to buy the portfolio and client base of the greying and retiring client advisers," he said.

One of the biggest dangers of not having a succession plan is you can build a business only to find you cannot extract the capital value from it when you try to sell. It’s not uncommon to have an excellent practice but no ongoing business.

As Alan Anderson of Money Managers points out, once you take the owner out of a small financial planning practice there might not be a lot left.

"If that individual was not there you have to look at the effect of a lack of sales growth on the business, a loss of 20 per cent of the clients, say, and the cost of having someone there to manage that while it happens," he says.

"When you start to look at these businesses on that basis you soon find that they don’t have any value."

A considerable amount of work, therefore, needs to be done to make this sort of business stack up for a third party.

Anderson believes a lack of succession planning is not only serious for advisers. It can also have a negative impact on their clients who can end up having their portfolios picked up by a third party whom they may or may not want to do business with.

So, when should you start to plan how to leave your business?

Cyril Chaplin, whose life broking company is the principal shareholder in Succession Planning Specialists New Zealand, says the day you start the business is the day to start planning how you’ll get out of it.

"Most people don’t get round to doing it till it’s too late. They don’t allow the time to get the right people to come into the business."

Succession Planning Specialists, which was set up in the mid-1990s by eight broking firms, puts together succession plans for a range of small businesses. The plans span anything from five to 25 years – however long it will take the principal shareholders or owners to get out with their money and bring new people in.

Anderson believes five years before retiring is a minimum for most financial planning businesses to start planning succession. That gives enough time for the current owner to work his or her way out and the right successor to get to know every aspect of the business, including, most importantly, its clients.

Dean Ellwood, a partner with Deloitte, Touche Tohmatsu agrees, saying the sooner succession planning is considered the better.

"This is because many key business decisions can impact an owner’s ability to dispose of the business for maximum value, for example a decision to take on new lease commitments," he says.

The most common succession options for financial planning businesses are introducing someone younger to the business and grooming them to take over at the appropriate time, selling the business to a financial planner down the road, selling to a financial planning network or fund manager, or, if all else fails, taking up a buyer of last resort option.

Regardless of which option you choose to pursue, the business will need to have a value put on it. And this is where some owners will get a shock. Their practice may not be worth as much as they think. Another complication is that there is no one accepted valuation model within the financial planning sector.

A practice’s value will depend on its mix of business – mortgages are valued differently from trusts, trusts differently from insurance, insurance differently from investment planning, and so on.

The key, Anderson says, is to have ongoing monitoring income within the business and to optimise it, because this will have the greatest value.

Research in the United States suggests the value of this fee revenue tends to be around 1 per cent of total funds under management or 2.17 times the annual revenue stream, less the expenses of running the business (including the cost of the manager). By comparison, a practice’s brokerage business might only attract a multiple of 0.7.

Ellwood says it’s important that business owners separate their self-worth from the value of their business and understand the drivers that create business value. However, he acknowledges that can present practical difficulties in many professional services organisations.

Anderson also cautions financial planners looking to sell, not to get too attached to their clients.

"It’s a mistake to have an emotional attachment to your business when you’re looking at finding someone to succeed you," he says.

"You need to ensure that you don’t only prepare yourself but that you prepare your clients for the fact that you’re going to get out but that their affairs will be well catered for."

He says it can be good protection for both buyer and seller to transfer clients and revenue separately, say over a two-year period, thus maximising benefits for both parties.

It has been said that succession planning is a leader’s final test of greatness. As Ellwood puts it: "It is the ultimate reward. It isn’t about giving up control; it’s about allowing you to control the best way to pass on the business."

Got a question about succession planning?

Send in your questions on succession planning to editor@goodreturns.co.nz and we will find some answers for you. Please include your name and address so we can contact you if need be.



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