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This is the third in a three-part series of articles about succession planning.  In the first part, which was published in the Blue Chip Journal in January 2022, I showed that people mean two completely different things when they talk about succession plans – Business Continuity (which I discussed in the article published in February) and Retirement Planning (which I’ll discuss here).

 By Guy Holwill

A retirement plan is different to a business continuity plan because it is something that you only need to think about later in your career.  However, it is not something that you should leave until the moment that you retire because you will almost certainly get less than you should.

Unlike corporate office jobs, being a financial planner gives you the option of continuing to work much longer than the traditional retirement ages of 60 or 65.  In some cases advisers need to work longer than this, but many others choose to continue working because they enjoy what they do.  As a mid-sixties adviser said to me recently “Do you think that my clients will stop phoning me if I stop being an adviser?  All that will happen is that I’ll stop getting paid”.

Your retirement plan is how you plan to exit your business.  This sounds straightforward, except that retirement means different things to different people.  In all cases it is about realizing the equity in your practice, but you need to choose between selling the business to someone else who will make it their own or leaving a legacy where the clients continue to feel your DNA long after you’ve left.  There is no right or wrong choice here and you are only person who can decide what is right for you.

Whilst there several possible scenarios, I’m going to reduce the clutter by limiting this article to three options to help you think about what is right for you.


Option A – selling your practice and walking away

This option is appealing to people who want to “walk-away” from their practice and don’t have time to transition their practice to their successor.  It is popular with advisers who want to start something new, as well as those who suffer from ill-health.

There is no magic in determining the value of your practice.  Regardless of the specific valuation methodology, it always comes down to the stickiness of your recurring income, and many advisers are disappointed when they discover that their life-long clients have no value to a successor because there is no ongoing revenue.

Therefore, if you want to maximize your selling price, you need to increase your ongoing revenue by stopping upfront commission or fees and moving to as and when commission or ongoing fees, and increasing the stickiness of your clients by focusing on the nature of their product holding (eg compulsory vs discretionary investments) and their relationships with you and your staff.

Clearly this is not something that can be done overnight, and it is something that you will need to actively manage in the years leading up to your retirement.

In scenarios such as this, it is typical to earn a multiple of around two times your annual recurring revenue.  Where someone offers you more than this, it is likely that they are going to churn the clients to their in-house products – and you need to consider whether this will be in your clients’ best interests.


Option B – transitioning your practice to a successor

This option is for someone who wants to sell but understands that best practices says that it takes around three to four years to transition relationships to the successor.

The key difference between this option and selling your practice is that the successor joins you for a few years so that the client relationships can effectively be moved from you to them.

The result is that the clients are stickier and that means that you should expect your practice to be valued on a multiple of around three times annual recurring revenue.  Once again, you need to ask questions if someone is offering you substantially more than this “arm’s length” amount.


Option C – leaving a legacy

An entrepreneur who has built a business that sells a physical product can leave a legacy by training people to continue delivering the same great product after they retire.  However, it is different for a financial planner because your clients are buying a customer experience that is based on your skill and the sense of comfort that they get because you care.

Therefore, if you want your legacy to continue, you cannot merely bring in a technically competent planner when you retire.  Instead, you need to bring them into your business long before you leave so that they can be absorbed into the culture that you’ve created.

Practically, there are several ways for you to exit while leaving a legacy and the best option is often dictated by circumstance.  However, I suggest that you consider a timeline that looks something like this:

  • While you are still working at full capacity, you identify a successor and bring them into your business
  • They spend a few years learning how you have created your customer experience. As part of this, they need to understand your advice philosophy and solution preferences and build relationships with your clients and staff.
  • As you approach “retirement” you inform both your clients and staff that your successor will start taking over the business, but that you will still be around for some time (you may want to start handing over some of your clients at this stage)
  • Your successor takes over the day-to-day management of the business, while you take on the role of figurehead
  • For several years, you remain in the practice, but you start to reduce your hours as you hand over your remaining clients
  • At some point, you step away from the business entirely

In terms of realizing the equity that you’ve built in the business, you have the option of selling the practice (like the previous option), although you would expect a valuation multiple of at least three times annual recurring revenue because your clients are much more likely to remain in the practice.

However, a better option for both you and your successor is that you do not do a valuation and instead you earn a percentage of all future revenue as an annuity.  While you can agree anything you want with your successor, two popular models are 30% for the remainder of your life or 25% for the remainder of your life plus 6 years thereafter to your spouse.

In summary, your retirement plan is your plan to realise one of your biggest assets.  Remember that retirement means different thing to different people, and that you can change your preference as your life changes.  A solid strategy is to meet with a practice manager and / or valuer every five years from age 40 to value your practice and discuss what you should be doing to enhance the value.  And then spend the next five years making those changes.

Guy Holwill is the Chief Executive of Fairbairn Consult.  He is a qualified Civil Engineer and Chartered Account and has worked in financial services for more than two decades.  Guy is passionate about creating business models that thrive in the changing worlds of regulation and customer experience.

Fairbairn Consult is a firm of Registered Financial Advisers. We are a licensed FSP and a member of the Old Mutual Group.