Baby boomers present a significant opportunity for financial planners as the generation born in the years immediately after World War II begin to reach retirement, and in the case of many of my clients begin to divest themselves from business. But does the retirement of baby boomers also present a threat as many financial practices risk wind-down rather than a managed exit and succession plan?
It is my belief a healthy market in financial planning practices is positive for clients, advisers who continue to work, and of course to provide an exit for those who are retiring; all of us should care deeply about this topic. However there are significant inefficiencies in the market, with gaps in perceived value in the eyes of vendor and purchaser, and this has led to many advisers continuing to practice – the rise of the lifestyle practice.
Industry studies, research and consultants propose “typical” valuation bases for financial planning practices but much of this is easily misinterpreted through a combination of half-truths and in some cases misinformation. Principal metrics for measuring the “success” of modern financial planning practices are often illustrated as: total income, assets under advice, number of clients and/or recurring revenue; none of this data is meaningful.
I work with business owners across a broad range of industries; the principal quantitative metric for measuring the success is net profit. This may seem self-evident, but bizarrely where profit is quoted in financial services firms it is often before directors’ remuneration. Offers are invited for a business on this basis, but clearly the business owner does not work for free, and as a potential acquirer we must add in salaries commensurate to provide a service of value to the end client; this is often not understood.
The purpose of a succession plan is to provide a framework which enables an existing financial planning firm to transition ownership and management to a new generation of advisers. Profit multiples will be higher for businesses with clear transition plans, and indeed plans in all business areas. The most valuable firms have dominant brands, are highly structured, have a clear client proposition, whilst putting the end client at the centre of what they do, there will be significant focus on compliant processes and risk management.
This may seem obvious but many firms, including networks, have allowed themselves to grow with unlimited risk being shouldered by the business principals and a significant proportion of the rewards trousered by the employees, or worse, self-employed advisers, who in some cases share none of the liability and 80 per cent plus of the fee income “reward”.
Then there is the stereotypical sole trader, who has built a business that shares the ideals of good customer experience, but unnecessarily tried to maximise the growth of the business. As the business has grown this adviser has been faced with a classic dichotomy; entrust my clients for whom I care deeply to someone else, or build a business that fits to their lifestyle and cashflow needs.
It is likely the RDR and the changes put in place will have accelerated the exit of these experienced advisers, and compounded by an apparent dearth of new talent they may feel trapped.
Irrespective of the genesis of the advisory practice, succession planning, and lack of it, seems to be a minority pursuit. Whether an adviser prefers growth and a managed exit, or the evolution to a lifestyle business, preparation and execution of a plan could take a decade or more. In the meantime we are vulnerable to the unexpected, and we should embrace a long-term strategic plan – it is what we provide our clients after all.
Alistair Cunningham is financial planning director at Wingate Financial Planning