Succession planning continues to dominate the minds of advice firm owners. How to we ensure clients stay looked after when the heads of the firm leave?
Having reached around 80 staff, Paradigm Norton, the financial planning firm with offices in Bristol, London and Torquay, has felt this pressure as acutely as any other.
This week, it was finally decision time, as the firm became one of the most prominent to largest advisers in the market to have created an employee ownership trust to sell to its staff.
Chief executive Barry Horner tells Money Marketing: “Its about creating a legacy business, a business for the future, rather than seeing it subsumed into something and have to ask where is Paradigm Norton, has it just disappeared?”
“We feel that we have built something special, like lots of entrepreneurs do, but we are trying to build something that stands out in the global profession of financial planning. I don’t quite see that in other firms. There are lots of good Chartered Institute for Securities and Investment accredited firms, but they’ve not done it on the size and scale we have.”
“Five or six years ago, our non-executive director said we have really got to start focussing on succession. It seemed a long way off but he was right.”
Paradigm has grown staff numbers and turnover rapidly in the last five years. This left the firm with a host of options in front of it, from a trade sale, to an AIM float, to a management buyout. But Horner says some of the firm’s management were reluctant to take ownership of it too. With busy personal and professional lives, Horner says, many decided it was best to focus on their family and individual needs rather than buying a business.
This led the firm to naturally consider setting up an employee ownership trust. Though the structure is relatively now, only being ushered in under the 2014 coalition government, Horner says it fitted the Paradigm Norton model well.
“The payout terms are longer, but we are all financial planners, so nobody in the business necessarily had to make a lot of money.”
“There was no consultation with staff in terms of the ultimate decision, because we felt that was the executive committee’s responsibility, but once we knew we needed the employee trust we got them involved quite early.
“You need to give them the relevant information, but you don’t want to worry them. A trade sale, however, would have set the cat about the pigeons.”
There is a significant amount of legwork involved in setting up the EOT – Companies House records show Paradigm Norton Employee Ownership Trustee Limited has been registed since last December. But Horner is adamant that firms smaller than his with different business models could still be able to pull off an EOT structure. Professional fees like legal costs are lower the smaller the firm is, for example.
There is an exception, however, where the current chief executive has a dictatorial style, because the structure is about “bringing people along with you, not telling them how you are going to do it”.
While an employee trust sorts out the problem of ownership, Horner points out that it does not solve the issue of leadership. Just because the employees now own stakes in the business does not mean any of them will be either willing to step up to the chief executive post, or have the skills to do so.
To this end, Paradigm Norton is also researching how it could start a leadership academy, and has had discussions with external trainers and universities. While at the time of our interview it had not been signed off by the firm’s executive committee yet, Horner says the idea has “built so much momentum no one is going to stop it”.
“It was a bit of an anti-climax. We sold the firm to the team, but then you just come into work like normal.”
Horner says he has a rough plan to stay with the firm for another seven or so years, taking him up to the age of 65 and giving the firm sufficient time to identify gaps in the management team.
“In one to one reviews with staff, I ask where do you want to be in 10 years’ time, and people say your job, chief executive. That’s not a problem, but if you have quite a lot of people saying that then you have to look at quite a number and the skills that can do that.”
Horner still advises some clients, but taking the leap into management would not be to everyone’s taste.
“You can’t run a portfolio of £1m recurring revenue and be chief executive,” he notes.
The firm had a team away day on the 5th of June to cement progress further, and decide what is next for the firm. When it comes to the future, acquisitions are still on the agenda after Paradigm bought The Red House in early 2018. However, given that deal still needs to bed in fully, Horner says these are likely to be at the smaller end of the scale, as well as noting that some bigger firms can have cultural issues that make them tough merger candidates.
“You know within five minutes of having a conversation sometimes that this isn’t a good fit. There are some firms out there genuinely working to launch a financial planning brand, but some large firms have said they do financial planning, and how they do it and how we do it is very different. It might not be right or wrong, just different.
“We have quite a strong culture. If you get that right people don’t tend to leave. It’s not about asset growth. We are not just paying lip service its fundamental to what we do.
“If you look back at the history of little financial planner where a large corporate has taken the over, you have to ask how this is going to work. There is still a mismatch of culture between large firm and smaller firm. As much as they say we are not going to change anything, it’s a bit disingenuous to tell smaller firms it will all stay the same. The reality is it isn’t. People look back with a bit of naivety.”
Horner gives the example of suitability report checking being moved hundreds of miles away. While this might make sense from a corporate perspective of risk management and consistency, the firm becomes “a small cog in a very large wheel”.
Paradigm Norton key stats:
Total staff: 44 (2017)
Staff costs: £3m (2017)
Total clients: ≈ 1,000
Turnover: £4.7m (2017)
Profit: £800,000 (2017)
Length of graduate programme: five years