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Succession Planning: Networks

Selling your financial planning practice to one of the networks is a succession option many planners think about. Like other options it calls for plenty of forward planning.

Thursday, February 7th 2002, 2:03AM

Selling your financial planning practice to one of the networks is a succession option many planners think about. Like other options it calls for plenty of forward planning.

People like Mark Wooster, General Manager Operations and Research at New Zealand Financial Planning, says an adviser needs to be talking to a network at least five years before he or she is looking to retire.

"Buying someone out is quite difficult because of the differences in the way people operate," he says.

"But certainly the best thing for people who are looking at succession planning is to get involved with a group like New Zealand Financial Planning and get their client base across to the group's programme."

One of the critical questions for a network in considering whether it is interested in a planner's practice is whether it stacks up as an ongoing business or whether it is simply a job that will cease on the adviser's retirement.

A lot of advisers find their practice is little more than a job, Wooster comments.

For New Zealand Financial Planning to be interested in buying a business, there would need to be a match of aims and objectives between the independent planner and the group.

Wooster says the group's administration systems allow advisers to focus on where they add value to their client business. This would need to be an adviser's objective during any transition into the group.

"The best succession plan is really one that takes care of clients' needs. So we would want to talk to the person about their aims and objectives," he says.

He believes a planning business is likely to be much more attractive to a potential buyer after five years of operating within a group and being supported by it.

Marshall Garrett, founding director of the Broadbase Group, also expresses an interest in buying independent practices. But, like Wooster, he would want a substantial transition period.

"We would want some sort of a lock-in because we recognise there's a relationship between the adviser and their clients," he says.

"We would want some sort of a formula that would deal with that for a period of time."

However, both he and Wooster highlight the difficulties of taking on small practices. These include not knowing how valid their fee flow is, their different ways of working and the often ageing profile of their client base.

"Buying a one-man band is a bit like buying a corner dairy. You don't know how much of the good will is in the guy," Garrett says.

He acknowledges this can also be an issue in bigger planning organisations but says a bigger group's systems and processes also ensure an ongoing business flow.

Garrett is particularly wary of sole practices where the near-retirement age of the adviser is reflected in the demographics of the client base.

"The client age demographic is one of the concerns, for example you can have a client base that's ready to die," he says.

Depending on factors like these, Garrett puts the going rate for planning practices at between 170 per cent and 200 per cent of the annual revenue stream. However, he also cites a practice that sold recently at 150 per cent of the annual revenue stream.

Succession planning is also an issue financial planning networks are grappling with themselves. Both New Zealand Financial Planning and Broadbase are bringing in younger advisers where they can - partly to handle current business volumes but also with an eye to addressing succession issues.

However, they say planners struggle to find the time and money to put in the training that's required to get a young person up and earning.

Garrett criticises the lack of an industry approach to this problem. He would like to see life companies putting money into training and developing the people who will ensure the future distribution of their products.

Beyond this, however, he believes there are longer-term succession issues for independent groups like Broadbase. He asks will today's independent planning firms continue to exist in their present form, or will they be swallowed up by the bigger corporates?

"We're looking at these issues and recognising that we have to position ourselves as a group for succession, perhaps for some sort of buyout," he says.

"This means we have to have a common administration system and a reasonable degree of consistency throughout the group."

Whatever happens, he believes smaller "one-man bands" are going to continue to struggle.

"It won't be easy for them in the longer term. Already we're starting to attract people who want to be part of a larger group to get the economies of scale."

David Greenslade, who has put the Portfolio Group together for Armstrong Jones, believes the trend towards amalgamation between advisers and with other professionals, such as accountants and lawyers, will provide new avenues for succession planning.

"Either advisers will join together as collectives, like the Portfolio Group, or as bigger companies. That will enable multiple shareholdings in companies rather than individuals which will provide further options for succession planning," he says.


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