A report released a couple of years ago in the US painted a stark picture of its adviser market, one we think closely resembles the Australian one.

The Cerulli report showed the average age of advisers in most channels was above 50 and one-quarter of advisers’ industry-wide planned to retire or leave the industry within two years.

With an ageing population, that’s hardly a surprise. The worrying part, though, according to research by the Aite Group, is that nearly two-thirds of advice practice owners had no succession plan in place.

In fact, our US research shows that advisers who are within two years of retirement have about the same level of succession planning in place as those who are 10 years away. While the focus of this research was mainly on the US, we believe our observations apply to other developed countries, with the same underlying conditions present in the Australian wealth management industry.

Succession has always been a challenge in our industry, but with the pace of retirement set to soar, the need to address succession planning in advice practices has never been more important.

At its core, succession planning is a process that gives an adviser the opportunity to monitor the value of his or her firm, shore up any weaknesses, and then execute a successful transfer of the business. With proper planning, advisers can transform their practice into a business designed to endure and prosper well beyond their lifetime – and serve generations of clients.

A well-crafted succession plan can help a practice owner take the steps necessary to realise full value for his or her firm, and execute a successful transfer of the business.

 Choosing a succession option

As a starting point for any succession plan, advisers should spend time reviewing the three major succession scenarios, and decide which best suits their business.

  • An internal succession: ownership transitions internally to someone already in the organisation. This option offers a high degree of continuity to clients and allows the current owner to identify and prepare their successor over many years. However, finding the right successor internally can often be a challenge – the talent required to manage the practice may not be present. Meanwhile, hiring externally for the next leader takes significant time. Budgeting no less than five years is suggested.
  • A merger with another practice: the owner looks to merge into another practice with a similar advisory approach and cultural fit. This allows a relatively high degree of safety and continuity for clients, and can even provide the benefits of the economies of scale that come with a larger business. That said, many practices struggle to find a firm that is the right cultural fit, and even once they do, integrating firms can be complex and time-consuming. Budgeting at least 18-24 months is suggested.
  • An outright sale to an external party: the owner sells their stake in the business and transition client relationships to the buyer. While this option provides immediate liquidity for the owner, for clients and employees alike the risk of disruption is high. Clients generally won’t stay with a new practice if they sense major changes in the practice’s culture, service, and philosophy. As with a merger, firm owners should expect an outright sale to take 18-24 months.

Laying the groundwork for a successful transition

With these options in mind, there are several steps advisers can take to help kick-start the daunting task of achieving a smooth and seamless succession.

  • Focus on client retention: The risk of losing clients during a succession can be high. For any kind of succession, proactively and consistently communicating with clients keeps them engaged and can reduce the likelihood they will move advisory practices. Continuity is key, and you should keep your client engaged with the successor throughout the process. After all, high client retention rates drive higher practice valuations.
  • Get a practice valuation: If done early, having your practice valued by a third party helps maximise the practice value by identifying opportunities to address any weaknesses before the succession takes place, and provides a point of reference for negotiating with potential external buyers. Valuation drivers include AUM, product mix, revenue mix, client age and tenure, client retention, and business location.
  • Connect with the next generation of clients: Future sellers need to ensure an ideal client mix across age ranges and build multigenerational relationships with client families. To do this, advisers need to demonstrate they can engage with younger clients and show they understand the next generation of investors. This means valuing transparency and convenience, face-to-face contact, and a collaborative style of planning.
  • Attract next-generation advisers to the practice: Advisers hoping to gain the business of next-gen investors will find that younger clients are looking for an adviser close to their own age who is likely to be practicing for some time to come. With proper mentorship, career guidance and leadership development, junior advisory talent will grow into valued contributors on the team, and your clients will become increasingly comfortable dealing directly with them. Much work remains to be done in this area. The State Street Global Advisors survey Money in Motion, from June 2015, found that only 21 per cent of advisory firms in the US have hired younger advisers in an effort to connect with the next generation of clients.
  • Consider the Emotional Aspects: Any transition requires founders who are willing to step back and hand control of their practice to somebody else – a difficult process for anybody who has built their own business. Advisers who take the time to consider the emotional aspects of succession, and how they might best go about addressing them, will greatly increase their chances of engineering a successful transition

Developing a succession plan can seem like an impossible task, which is one of the reasons so few advisers willingly go down this path. Reflecting on the steps above and implementing those that your practice is lacking can help ensure a smooth transition when the time comes to move on.

Among the very best advisers, succession planning is universally a high priority and something they are constantly refining. Creating a business model that can live beyond the principal is absolutely paramount to their success.

Brie Williams is global head of practice management at State Street Global Advisors. State Street Global Advisors is the investment management arm of State Street Corporation.

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