Lack of 'natural pathway' for generation of advisers

The reluctance of business owners to sell their advice firms is leaving a generation of advisers unable to progress, according to Succession Plus.

Many owners were now working into their advanced years which meant there was “no natural pathway” for younger members of staff to take over the business.

Speaking to Money Management, chief executive, Craig West, said when advisers did eventually sell-up, they were often skipping a generation in their 50s and going directly to those younger staff in their 30s.

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West said: “We are seeing people working until their 80s, they are in no rush to sell up. They are loyal to their clients and stay too long which makes succession planning difficult.

“There has been a dramatic change, 10-15 years ago, it was about selling the business, now baby boomers are already wealthy so they are less reliant on the sale and money is no longer the goal. They want to be able to keep staff and clients and leave a legacy, that is their number one outcome now.”

As a result, many advisers of in their 50s were leaving firms and setting up on their own but the costs of compliance meant this was not always a viable option for everyone. Others were leaving the industry and choosing new careers altogether to avoid taking the Financial Advisers Standards and Ethics Authority (FASEA) exam.

“When they do sell up, a generation is skipped and there is no natural pathway for younger members of staff. Then it has to become an external sale which is more difficult and a harder transition for clients,” West said.

“There are people aged 65-70, then people aged 35-40, it is the generation aged 50-55 who are missing out and they don’t get the chance to take over the business, they are missing out completely.

“So then they don’t want to wait and end up taking their clients and setting up themselves which is something we are seeing more frequently.”

In light of this, he said an option for firms was to set up an employee succession ownership plan which enabled staff to buy the owner out over time which created a gradual transition and let staff feel invested in the business’ future.

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Anyone who's ever had to deal with the tyre kickers when contemplating the sale of their business will fully understand why owners are hanging on to their practices. Offers of payment over 5 years, etc. Shares instead of cash. Growth targets built into the deal. Pass, I'll keep working and seeing my clients.

I get that vendors think that their asset is the best and worth x 20 (every vendor does) but you have to take that valuation in the context of the market.

why would anyone want to enter this space. the big 4 banks cannot make enough return on equity and you expect a small-time financial planner to pay you top dollar.

I think the purchaser's offer are realistic, it's the practice owners who live in day dreamland. it isn't going to get better for practice valuations it will get worse. much worse.

the government has already spoken, the solution is Digi advice, whether we like it or not. so you can cling on to your practice and anchor back to when you go x 10 revenue. you won't get it, my friend.

totally agree, which is why we'll keep working. three decades of building client relationships carries too much value for us in lots of ways. We'll keep enjoying the cash flow and the satisfaction that comes with our work and never mind what the value of the practice is. It's not keeping us up at night.

so you build a business that has no resale value and the plan is to keep working in it until you die.

is that how business works? not saying your plan is flawed, it's a good plan for you but is that the plan for others who wish to enter the industry? would others accept that?

I don't think so, the viability of the sector is questionable now. it won't survive.

I certainly need improvement in writing my thoughts down in a forum like this. My brain has a clear picture but by the time it reaches my fingers......... My thoughts are that with what's been done to our profession and by association the values of our businesses you might as well keep working and either have a good succession plan and maybe retain some ownership which is our strategy (hopefully) or face the fact that going forward like so many business owners in other fields you really can't rely on a capital value to retire on. I remember AMP client books going for 7 times in the late 80's, much has changed.

I agree with you. everyone is focused on the wrong issue, they are thinking about the new enhanced fds disclosure or the fact that we now have to get another fee consent signed for trustees if fees are debited from a super or pension account. those are minor details we can easily do it many of us are already doing annual agreements, no biggie.

we are not seeing the big picture, the big picture is that there are single-digit entrants to the profession.

over 52% of advisers have departed with another 10,000 waiting in the wings to exit by either the end of this year or in 5,000 annual increments to 2026.

the sector is just not viable anymore. the exit of so many advisers (including limited license holders) will have a domino effect on the costs which will spiral out of control decimating all.

the dealer groups, the fpa and afa don't seem to get this but the exodus is on at over 100 exiting each week.

that's the issue.

The AFA and FPA "get this" but there natural market is groups like AwareSuper. Not small businesses. They can get $100K plus and a spreadsheet of names. They're quite content knowing many advisers will transition across to TelstraSuper, AwareSuper etc etc.

the associations may think they will survive, but they won't, the FPA has already reduced their headcount by 6. in a recent FPA roadshow, the CEO of the FPA was asked whether they would consider merging with the AFA. I think they know it's on the cards, it has to because after this 30 June when many paid-up cfp members resign their membership base will be decimated. the number of CFP's has not gone up at all.

the membership bodies may be a non-profit body but the people who work there expect to be renumerated at market rates. without members, they can't exist. it's not like aware super will have 5,000 cfp members. they may have a couple of hundred at best (if that).

the FPA's CEO's salary is in the mid 500's (which is fine because it is in line with what CEO's of other membership bodies get paid, CA ANZ pay around $750k (last known figures), Alex Malley of CPA fame used to get about $1.5m and the CEO of IPA gets about $650k )

the bonus pool for executives at FPA alone is $1m so the AFA and FPA need at least 15,000 registered financial advisers in Australia so they can get a small % who become their members. we are already down to 19,800 with about 10,000 left to exit.

so the entire sector is not viable anymore and it will become all too apparent by the end of this calendar year.

It is a common plan for many self employed people in many industries. Their primary objective in starting a small business is having a secure job with a decent income and control over their own destiny. It is not about the money they might make by selling it later on.

Financial advice was a bit unusual compared to other industries, in allowing small business owners to sell out for vast sums. This was due to the big chequebooks of product providers willing to pay for "distribution" capability. But those days are gone, and the concept of small business owners working longer and gradually easing out will become more the norm, as it is in many other industries.

Digi is fine if you are small and have low needs, I see it as a great nursery for clients in my FP business and a way to manage the business for less cost and hopefully less regulatory risk. Once the game gets bigger (for the client) they are likely going to want more than digi is likely to be capable of providing for at least 10 years if not longer.

Secondly there will always be some section of the community however that just wants a person and are prepared to pay for it.

Yes the associations have some pain coming but that is self induced as they did not get control of the regulatory issues like the CA's or law society would have. They'll get what they deserve, they've finally cottoned on to the advocacy needs but it's too little too late, this is a longer term problem for the profession however if any advocacy we do have gets neutered.

A good FP practice should have 20-33% profit margin, if you are earning this on top of your salary you won't need big payout to retire very comfortably.

The profession is not finished. If we end up with 10,000 advisers that are of reasonable to high quality you'll have to keep new clients away with a stick. There's plenty of BMW's and Audi's on the road when a Hyundai will get you there for 25% of the price.

Our new business this year has no parallel in quantum, I expect this to continue. Just the regulatory and compliance overkill is going to deny ordinary Australians good advice. This, as well as killing off the experienced cohort unfairly, is a disgrace that the government, ASIC, treasury and FPA/AFA have to accept responsibility for.

I wholeheartedly agree with your comments. but I think you are the exception and not the rule. many advice practices are only marginally profitable.

the exit of so many will ultimately impact you as well because if many dealer groups go out of business the cost of PI for the remaining will increase. if you can't be in a dealer group, being self-licensed may not be an alternative for many if PI goes through the roof. there is not a huge market for it anyway.

the cost of adviser levy will triple all these issues will ultimately impact the ability to continue operating profitably. and I am just saying that the accountants leaving - who were shouldering a lot of the adviser levy - is going to have devastating effects for the industry and a domino effect.

it's going to be catastrophic by the end of the year and I don't think this is understood very well.

I actually think the adviser levy in its current form has numbered days

PI premiums may go down if only average to great advisers are left. Premiums could in fact reduce, here’s hoping anyway!!

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