Advisors ignore own succession plans

The financial services sector faces an advisor succession crisis, due in large part to an industry structure that discourages advisors from arranging succession plans, according to speakers at the recent Advisor Distributors’ Summit.

“There’s very little value for an advisor to say ‘I’m doing everything I can to build this thing up so I can sell it as soon as possible and get out’,” said Robert Frances, president and CEO, PEAK Financial Group in Montreal. “I don’t hear that from advisors.”

Frances said advisors may be victims of their own passion for the industry. “That passion is converting our need for proper business succession plan into an aversion to succession plan.”

He opposed the theory that likens the financial industry to the medical industry with regards to people’s aversion to retirement.

“I will propose, on the contrary, our industry is a retirement industry for many,” said Frances. “It’s the industry people retire into, not out of.”

The competition, he said, was not coming from young college graduates but from seasoned bank managers who retired and set up their own practice to benefit from the network they built during their career.

“We cannot look at the whole recruiting and succession issue without keeping in mind where the people are coming from,” he said.

Frances said the generation gap between clients and advisors was another spanner in the works. He pointed out that there is an underlying propensity of people to relate better to people of their own age group.

“When you’re at certain age, you relate to people of that age. That’s what we see in our business,” he said. “Advisors of a certain age or in a certain community will have clients mostly from that group. There is a generation gap that might have something to do with it.”

The industry’s indifference to hiring young recruits is made worse by the reality of distribution of wealth. “The problem is that money is not located with the 20-year olds or 30-year olds. It is in the hands of those in the age range of 45 years to 55 years, and an especially huge amount of wealth is in the hands of those 55 years and up.”

Frances said advisors were not keen on the idea of succession. A reflection of that, he said, was in the absence of a business plan in their scheme of things

“In general, we don’t sense that advisors welcome the concept of succession. Very few have written detailed business plans. They have targets and objectives.” He said very few actually had a business plan that could be transferred or taken over by those who wanted to buy their practice or join them at a junior level.

“The problem with that is that it leads to a bizarre economic model where we are instilling in our industry buying and selling practices based on archaic proxies for true value,” he said.

That proxy, he said, was starting to develop some very serious problems. “The only true form of valuating anything is the discounted future cash flow method. Everything else is a proxy.”

He said advisors would do extremely well if they were to find a way to get more value in their practice.

“Lack of a business plan is creating an environment where advisors are not looking at the financial value of their practice and because practices are dropping, advisors don’t have the currency to go out and shop parts of the practice.” He said the whole industry needed to grow up in that area and that MGAs and dealers could help advisors capture their value. That would, in turn, would increase the value of the distribution companies.

The dichotomy in advisors’ understanding of the risks of their business also had an impact on succession plan, said Frances. “On the one hand, they overestimate the risk of loss of relationship with clients if a junior comes in and, on the other, they underestimate the risks associated with a junior coming in and doing things wrong.”

He said lifestyle considerations were another reason why most advisors were not ready for succession. “There’s something about their lifestyle — growing the business, managing it and having the technical knowledge around it — that makes it very difficult for the succession to happen.”

Frances said the industry was experiencing a snag where existing advisors were slowing down rather than retiring which would pave the way for new recruitment. “A lot of advisors are not looking to buy another book. They are looking to slow down.” From the industry point of view, there is a bottle neck, he said. “We have those who can’t find financial advisors, and (there are) financial advisors who can’t get in.”

He said strong client loyalty further put a damper on any hopes of the reversal of the trend. “I don’t think the market for successors is ready. The supply and demand side is not good. The client likes to deal with advisors just like them, they are extremely loyal to advisors.”

As an advisor it feels great when your clients say they don’t want you to retire, he said. It’s little wonder that advisors are not very open to turning a new page in their book.

(05/06/10)