Planning for the future: How to succeed at succession
Retirement might seem like a distant event on the horizon, but delaying succession planning to the last minute can have repercussions for both you and your clients. In this article, we highlight the importance of succession planning and provide guidance on how to ensure a seamless transition to a successor.
Regardless of the circumstances – be it retirement, unforeseen events like illness or death, or personal responsibilities – everyone will eventually exit the financial services industry.
As the owner of a financial advisory business, it’s imperative for you to identify a successor who can seamlessly take over the reins one day; this will safeguard your interests, as well as those of your clients and staff.
What is succession planning?
Succession planning involves a comprehensive strategy that aims to transfer business ownership to a successor, either someone within your company or an outside individual or business. This strategic approach ensures the business can continue its operations even when the owner steps down.
Beyond continuity, succession planning also ensures the value owners have accumulated in their businesses after years of diligent work is realised when they exit, either as valuable retirement capital for themselves or an inheritance for their beneficiaries.
How planning ahead benefits your business
Maintaining client relationships: A well-thought-out succession plan instils confidence in customers, suppliers, investors and other stakeholders by demonstrating that the business is prepared for the future and has a plan in place for ensuring stability and growth.
Mitigating risks: Life is unpredictable. If an owner needs to step down earlier than expected due to health problems or an accident, a well-thought-out succession plan can ensure a smooth transition, minimising risks and ensuring compliance. Moreover, the owner won’t be forced into a quick sell to cover medical or other costs.
Adding value to the business: A succession plan will enhance a business's value, making it more attractive to potential buyers or investors.
Sustainability in business: Through succession planning, a business can identify and develop talent within itself, ensuring the business can continue to operate effectively even after key employees retire.
Transfer of knowledge: Documenting critical information and knowledge held by key employees is an integral part of succession planning, and this retains and transfers the business’s intellectual capital to the next generation of advisors, ensuring that clients continue to receive high-quality advice and service.
Navigating the complexities of succession planning
There is no denying that succession planning is a complex, intricate endeavour, but by taking the necessary steps, you can implement a plan that will benefit all role players. Do the following to ensure that your succession plan is practically implementable:
Choosing from within – or should you look elsewhere?
In deciding whether to sell your business to an outside FSP or train an internal successor, there is no one-size-fits-all solution. However, in general, if there’s someone in your business who could potentially take over, training an internal successor is often easier.
Selling your business to an outsider is a complicated process that involves various role players and factors. Ensuring everyone is aligned and plays their part in successfully executing the plan can be arduous, potentially leaving successors and beneficiaries out in the cold. For instance, if the successor lacks broking contracts with your product providers, securing these contracts can become a challenge. Instead of granting the contracts to a successor, providers may choose to redirect clients to their tied agents. In addition, the decision to sell is strongly influenced by market conditions, which can vary and have a substantial impact on the ease of finding a suitable buyer.
On the other hand, training an internal successor facilitates a seamless transfer of knowledge, ensuring continuity of business practices and client relationships. Furthermore, a successor who is familiar with the business and has established client relationships may inspire a greater sense of comfort and confidence among clients. As a result of this familiarity, clients may be more likely to remain with the business during the transition period.
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In addition, promoting an internal successor will be more likely to maintain the existing culture and values of the business, ensuring continuity in service delivery and management of the organisation.
Despite its benefits, the training of an internal successor demands significant time and resources, which many FSP owners may lack. However, there are online programmes and courses that can assist with preparing potential successors. Masthead's Key Individual Programme?, for example, is a 12-month online course that provides an in-depth understanding of a Key Individual's responsibilities, allowing potential successors to complete it at their own pace. While this course covers theoretical aspects, plus the practical implementation of legislative requirements and Treating Customers Fairly principles, owners can focus on mentoring successors in other business aspects.
Even though training a successor takes time, streamlining the process and investing in a well-prepared internal successor can outweigh initial challenges. Another alternative for those averse to external successors or bringing someone in is joining an FSP like Masthead Financial Planning – an ideal solution for solo practitioners and those without a successor.
Beware these pitfalls:
Whether you choose an internal employee or an outside partner, succession planning comes with several challenges. Be sure to avoid these common mistakes:
Choose your successor wisely: Owners often appoint a friend or family member as their successor only to discover the person is unsuitable. When assessing successors, rather focus on their skills and leadership fit. Consider their previous experience, competencies, leadership style and fit with the business's culture.
Consider competencies, not just seniority: Seniority alone does not guarantee leadership effectiveness. Owners may need to extend their search beyond the business's top management to find a suitable successor. This underscores the importance of planning for succession in advance. If a mid-level or more junior staff member shows potential as a successor, owners must allocate enough time for proper training and gaining experience.
Prioritise transparency and communication: Effective succession planning requires clear communication to avoid confusion. Ensure everyone understands the process, criteria for selecting successors and their roles.
Align with business strategy: Succession planning should align with the business’s strategic goals to develop leaders who contribute to overall success.
Continuous evaluation: It is not enough to establish a succession plan once and then move on. Regularly monitor and evaluate its effectiveness, adjusting as needed.
Delaying succession planning is common among business owners – it’s unpleasant to consider a future where you’re no longer around. Yet, in an ideal world, your succession plan should be part of your business plan from the start.
Think of it this way: just as you ensure your clients’ assets are protected and their families are provided for financially when they’re no longer around, you need to make provisions for your own future and that of your beneficiaries and clients when you retire.
Learn more about our Key Individual Programme
In an evolving regulatory landscape that prioritises outcomes over mere compliance checkboxes, Masthead's Key Individual Programme? equips participants not only with the knowledge of laws and regulations but also empowers them with the practical wisdom needed to integrate these requirements into their businesses.
By successfully completing this programme, participants will gain the expertise required to manage the daily tasks of a Key Individual, such as ensuring legislative compliance, delivering outstanding results to customers by treating them fairly and safeguarding the FSP against risks.
For additional information or any queries, please don't hesitate to reach out to us at [email protected] .
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