Sell out to a consolidator, merge with a likeminded competitor or help the next generation within the firm to buy you out? Put crudely, these are generally the main choices facing a few thousand owners of adviser businesses who are now in their 50s or older.
Advisers often place succession planning in the ‘too difficult’ pile of problems, while they focus on the day-to-day challenges of dealing with clients, regulation, platforms and running a business. However, when advisers get together to discuss their businesses, succession is one of their top issues.
At Platforum we have recently hosted a series of adviser round tables in which we asked about a range of issues, and succession planning was one that generated really interesting comments – especially about consolidators and their like.
Advisers have mixed and often sceptical views of consolidators. On the one hand, the idea of cashing in for a large lump sum – or a series of payments – sounds deeply attractive. Tales of payments equal to multiples of three or more times ongoing income streams are extremely tempting, even if they don’t always match eventual reality.
On the other hand, many advisers agonise about what hoops they would need to jump through in order to raise the promised capital sums from the consolidators who buy them. Most advisers know they will generally get the biggest rewards from persuading their clients to convert to the consolidators’ own business model – typically onto a new platform and a fresh investment proposition. That may turn out to be a good idea, but it probably isn’t motivated by client needs and desires.
Most advisers really want to do right by their clients. And that includes making sure they are properly looked after once the advisers themselves have retired.
And it isn’t just the regulators’ concerns about shoe-horning that worry advisers. They are genuinely concerned about how their clients will react and whether the changes will be in the clients’ long term interests.
These concerns are convincing. Advisers create close and lasting relationships with their clients – often over decades. Most genuinely care what happens to their clients and many retired advisers live together in the same community with their clients.
Of course some advisers end up taking the consolidators’ money and the outcome is fine all round. But the advisers at our recent round tables said that such sales can often end in tears – with unhappy clients and advisers. They quoted examples of firms where the business owners didn’t get the money they expected and the other advisers moved on as soon as they could. Indeed this partly explains why mergers and takeovers don’t seem to reduce the overall number of firms.
An idea floated at one of our round tables was that financial advice firms can become more like other professional firms – accountants and solicitors, for example – who tend to make a good living from their partnerships while they’re working but don’t expect mega capital sums when they retire. Younger partners or co-directors buy their shares – usually gradually and perhaps with the help of the company facilitating some outside finance.
Another route advisers mentioned is amalgamating two or three small firms where at least one of them has an upcoming bunch of younger advisers. These arrangements are often described as mergers’; but as one adviser that has been round the block several times noted: “In my long experience of M&A activity, I have seen lots of takeovers, but I’ve never actually seen a true merger; someone always comes out on top when two firms get together.”
Advisers may soon settle on solutions that allow them to exit the business but still look their old clients straight in the eye.