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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about succession plans with John Novachis, executive vice-president and head of advisor growth and succession at Investment Planning Counsel. We talked about the role of transparency, and we started by asking why advisors, who are so used to talking to other people about their succession plans, seem less likely to consider their own.

John Novachis (JN): The area of succession planning has been a growing issue and concern for many years. Our research would indicate with very strong hypothesis that the size of the problem is about $500 billion in assets. That’s $500 billion of clients’ assets managed by an advisor that has either reached or is about to reach a retirement age. Over 80% of advisors understand the importance of the succession plan, but only about 25% of them actually have done something and have a documented plan; 91% of clients are saying they want to hear from their advisor about what their succession plan is. If there is not a great succession solution, how will those businesses move from generation to generation?

Why having succession conversations is so important

JN: Historically, it’s been one of those let’s-avoid-that conversation. And I can’t tell you how many times I’ve spoken to advisors about what clients are saying. And the answer is, my clients want me to be here forever. Well, that’s just not realistic. Similarly, staff members, they need to actually see what the plan is because in some cases staff members have been tied into the equity value of the company, and there might actually be some great people in the business today that might want to step up and be the successor. So, if you’re not having those conversations, and everybody’s just assuming everybody’s going to be there forever, well, we’re not really being honest with each other.

The role of transparency

JN: The key to any successful succession plan is not the transaction itself. It’s the transition of the client from the senior advisor — the departing advisor — to the incoming advisor. Everybody asks me how long will it take? Is it going to take me two weeks? Is it going to take me two months? It will take however long it takes for the client to feel comfortable. And I always use this example: you know a successful transition has taken place when the client stops calling the senior advisor and starts calling the successor advisor. It can be weeks, months, in some cases, years depending upon the relationship between the customer and the advisor.

Easing the transition

JN: If you build a business around you, where the business is you, then how easy is that business to be transitioned to a new advisor? Being indispensable isn’t the best formula for building a successful business that can be transitioned. In fact, it actually will detract from the value of the business. The more successful businesses are built on processes, experience, consistency of delivery that can be executed whether the senior advisor is present or not.

Finding your successor

JN: There are a growing number of options. But the more traditional options have been peer-to-peer transactions and what I would call next-gen transactions, where family members have come in to take over the business. In both of those options there is a lot of risk incurred on the part of the selling advisor. That risk is competency and capability. Competency — being a CFP, being experienced — that is a little easier to handle. It’s the capability part that is quite troubling. I might actually be a great advisor, but I may not have the financial capability to buy the business. You need to marry those two components — competency and capability. And there are incoming solutions now where corporations are taking a position to say, ‘We will assist, because we are well capitalized,’ which takes away the capability question. And participating in a transaction with a strategic buyer or consolidator can also bring forward some great talent to take over the business.

Developing a timeline

JN: I would say the most important thing in terms of setting up a succession plan is starting with the end first. What is the timeline for me to exit the business? Always start with the end in mind. And that will be a very good indicator of the work-back plan needed. One day we will exit our business. Do we want to decide when we exit the business, or do we want somebody else — or something — to decide. So always start with the end in mind, and that will be a very good guide.

And finally, what’s the bottom line for advisors?

JN: I would say the bottom line in any successful succession solution boils down to three things. I need to do right for my client and I have to make sure that my client is looked after. If I ever run into my client at Costco on Saturday morning, I want my former client saying, ‘John, you did very well by me in introducing the successor to the business.’ So, client interest first. Number two is the staff. It’s often overlooked. These people have been with entrepreneurs for many, many years and have helped create significant enterprise value. So, we have to look after the stakeholder interests of our staff. And finally, it’s ourselves. It’s doing right for ourselves and the business. For all the freedom we’ve enjoyed and the risks that we have incurred, there should be a premium value for the great business we’ve built.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to John Novachis of Investment Planning Counsel. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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