Financial advice practices may be hiring professional year candidates as a succession option, but they may find they are unable to put up the capital if the adviser looks to retire.
There is currently an “urgent succession planning challenge” in the advice space, and businesses without clear plans risk value erosion and a reduced sale price if they cannot demonstrate a smooth handover process for staff and clients.
With the average adviser being 52 years old and many looking to retire in the next five years, bringing in a younger adviser or professional year candidate who they can train up may present an attractive option.
But speaking to Money Management, Joel Ronchi, chief executive at compliance firm Fourth Line, said younger staff may be less attractive than first thought. Not only are they more likely to switch between licensee, they would typically lack the capital needed to buy an owner out of a practice.
Research by Adviser Ratings found that newer advisers who have commenced post-2019 are likely to spend an average of 18 months with an Australian Financial Services licensee before moving.
Ronchi said: “A young candidate is going to have fewer commitments and be more focused on their career pathway whereas an older one probably wants flexible working.
“If you’re a mature-age candidate who has finished their professional year, who has kids and mortgage, then they have a different life and are less likely to want to jump around; they aren’t running after the next shiny thing.
“For example, I spoke to a lady who was 52 and used to be a nurse. She’d done her graduate diploma in financial planning, reskilled, and got a new job. That involved taking a pay cut, but she was settled so she felt like she could take that risk.”
Likewise, if an adviser is looking to sell their practice in the future, a mature-age or career-changer candidate would be more likely than a younger one to have the capital available. They may also lack the appetite to take on the pressure and expense of running their own business.
He said: “One of the challenges that existing advisers face is with succession planning because a lot of advisers coming through can’t borrow enough money to fund the succession and the equity buy-in. It’s a very challenging environment.
“Housing affordability is really challenging and people are struggling to get onto the housing market. So therefore those younger advisers don’t necessarily have an asset they can borrow against as collateral to fund the equity buy-in of an advice practice.
“The idea that an existing adviser would take on someone with the expectation they would buy them out in the future is harder if they are a younger adviser. If you’ve got a 25-year-old with no assets and a 50-year-old who has already paid off their mortgage, then the 50yo is in a better position to borrow to buy you out.”
John Birt, chief executive of Radar Results, said the youngest buyer he had observed was in their early 30s, but that it would be better for them to wait to gain more experience as an adviser and a business-owner before they thought about buying out an existing practice.
“They need to have at least three years experience before a bank will even look at them to think about lending them the money. It all depends on the size of the business, how many clients it has, how many staff it has, too.
“I’ve seen some younger buyers join forces in an advice partnership as that makes it easier to get funding and they can combine their finances as that gives them better buying power.”
However, all is not lost for younger staff as a potential financing option interested in taking on the practice is through vendor finance which is an internal form of lending where the seller lends the buyer money to help pay for what is being sold over a number of years.
Money Management previously covered that younger advisers have options available if they wish to seek capital.
“Junior staff may underestimate their ability to participate in succession plans, despite viable funding options being available earlier than they may anticipate. It’s worth business owners making potential future leaders aware of options that may be available to them,” said Olivia Ellis, head of financial services at Macquarie Business Banking.
The succession dilemma is more than just a matter of commitments.This isn’t simply about younger vs. older advisers. It’s an industry-wide rut. Post-Royal Commission reforms have driven up compliance & costs, and reduced incentives.
Today’s entrants face a whole different ordeal of economic issue, cost of living, income stagnation, you name it. Stepping up into succession means significant costs and risks, and the return doesn’t even look compelling when you look at alternative sectors. Where’s the incentives?
I have known a couple CSO/CSM in smaller practices, earning $70K~$80K p.a. before tax, and all of them expressed the same concern that it’s not worth staying in this industry. The remuneration won’t keep you alive with housing costs, be in rent or mortgage… let alone the costs required for upskilling and successing.
It’s not about lack of commitments, chasing shiny things or whatsoever claimed here. People are seeking a better environment – simply to survive. If the environment isn’t ideal, why would one even consider it.