Minimising key person risk for solo AFSLs

With a third of Australian Financial Services Licences (AFSLs) being solo advisers, how can they ensure they are still attractive propositions for buyers when it comes to their succession planning?

According to Wealth Data, the number of single-adviser practices make up 33.5 per cent of total AFSLs. While they are small firms, they have the greatest experience with over three-quarters of advisers (81.3 per cent) in these firms having 10 years’ experience or more. 

However, research by Colonial First State found 47 per cent of advice practices said the business couldn’t operate effectively without the owner, and a further 23 per cent said they were unsure of what would happen if the owner was absent from the business.

This presents a challenge of key person dependency at the point of sale if the practice only has one adviser to rely on, and means their potential sale price could be limited by this practicality. 

Speaking to Money Management, Alex Euvrard, managing director at self-licensing specialist My Dealer Services, said it is crucial for solo advice firms to be able to demonstrate robust systems and processes.

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“If a solo advice firm keeps client advice files in ‘sale-ready’ condition, regularly updates policy and procedures, and can demonstrate a well-managed and documented client engagement and new business generation model, as well as a robustly maintained clean compliance record, then it will be much easier to transfer the business as a going concern to a new adviser-owner.

“Well-grounded, sale-ready practices document compliance workflows, implement independent reviews, centralise compliance documentation, have a compliance calendar, and ensure they keep up to date with legislation. If these tools are effectively implemented across a practice, it lessens the dependency on any particular individual.”

With the lack of a second individual on hand to cross-check issues, Euvrard recommended solo firms work with third parties or independent consultants to get a “fresh set of eyes” on the business who may be able to identify any potential issues. 

From a technology perspective, a second issue lies in the fact that there will be no second-in-command if anything unexpected happens to the adviser. This could include trigger events for an involuntary sale such as death, disability, or divorce. 

Commenting, Fraser Jack, founder of The Cyber Collective, said solo advisers would typically “buddy up” with another solo practice in the event of any problem where a contract will allow them to access their IT systems.

“That allows them to approach the IT person or the managed service provider and get that data. As long as a contract is in place which states that person will be taking over, that should allow them to do that.

“Their IT provider will typically also have administrative log-in rights to get into that system and restore a back-up in the cloud or Microsoft 365.

“Typically, the AFSL holds responsibility for the clients, but if the individual is self-licensed without a succession plan, then that does present an issue regarding who is responsible for the data.”

However, he warned there had been incidents where an adviser sold a part of their client book only to find another adviser had been able to access their back-up and was targeting those clients. 

“When you are getting ready to sell your business, if you have a strong cyber presence and you have strong security in place, then you will have a higher valuation. 

“I have heard of incidents where people have purchased books of business that have later found out that someone else had a back-up and was targeting those clients after the book had been sold. From a sales point of view, an incident like that would devalue the business, so making sure you have a strong cyber presence and compliance documentation allows us to maintain a higher business valuation.”