The financial advice industry is currently facing a succession crisis as many independent financial planners reach retirement age. The problem is exacerbated by the fact that fewer young people are entering the industry.
By Alex Cook, CEO, GCI Wealth
The current cohort of financial advisors are reaching retirement age and, as an industry, it seems we are paying insufficient attention to what happens to their clients. Coupled with this, fewer young people are entering the profession, especially as independents – this will inevitably drive up the costs of independent financial advice. Both scenarios are bad for clients.
There are several facets to this succession crisis, which are worth exploring.
Traditionally, independent financial advisors tend to build close relationships with their clients over several years as they help them to develop and then implement strategies to achieve financial goals. The very closeness of this relationship means that when financial advisors retire or leave the industry, it is hard for clients to replace this relationship of trust built up over many years.
At the same time, the financial advisors themselves face the challenge of replacing a high income stream from their businesses.
FAIS legislation mandates financial advisors to have a succession plan but these are typically poorly thought through. In addition, many of the succession plans are not executable as clients need to sign individual appointment letters to the new financial advisor in the case of a succession event such as retirement or death. In practices with large client bases, this cannot be achieved in a short space of time.
A common scenario is for one financial advisor to nominate another to take on his or her clients in the case of death, often financed through a life insurance policy. However, independent financial advisors seldom have the capacity to take on a new client base and so the clients (except for the high-net-worth ones) in effect get left in the lurch.
Much the same problems exist if a sale is negotiated prior to retirement. Independent practices are typically sold for around twice their annual revenue, often to a large investment house with deep pockets. The sale figure may seem large when the contract is signed, but it actually does not provide sufficient capital to replace the lost income stream. At the same time, too, clients can resent the fact that they have been “sold” without having much say in it, and the acquiring company usually finds that many of the clients desert the practice sooner or later.
Another dynamic that contributes to the making of a perfect storm is the insufficient numbers of new entrants into the market, as noted above.
Figures from the Financial Planning Institute of South Africa indicate that there are just under 5 000 Certified Financial Planners (CFPs) working for more than 800 organisations in South Africa. Many other financial advisors do not hold the CFP qualification, so the number is significantly higher. But the fact is that it is a very small number of people to advise a large and growing population.
Another important fact is that CFPs between the ages of 40 and 49 make up the largest subgroup, with the next largest group those between the ages of 50 and 59.
In short, there are clear indications that the profession is not attracting enough young people.At the same time there haven’t been any satisfactory succession options for the existing body of financial planners.
When this insufficiency of new financial advisors and a steady increase in population means that more and more people will be left without access to independent financial advice. In other words, fewer and fewer South Africans will retire with financial security.
Lateral thinking to avert the succession crisis
To solve the succession crisis, one needs to take a different approach. One that works well is to provide a back-office framework for several independent financial advisors, including compliance, commission reconciliation and asset management. This allows the financial advisor to spend more time with his or her clients. The company providing the back office can then facilitate closer working relations between financial advisors using its services. In this way, the financial advisor can continue to work productively for as long as desired while, at the same time, introducing clients to the other advisors.
The point is that clients are transferred to new advisors as part of a process agreed with the back-office provider and in line with the exiting advisor’s overall plans. There is thus much less reason for clients to feel abandoned as the process allows the client to feel involved in any succession planning, whilst addressing any concerns they may have, resulting in harmony.
Revenue-split agreements ensure that an income stream into retirement can be created. A recent example makes the point. My own company was thrilled when recently Sandy de Bruyn of Sandy Wingfield-Turner & Associates decided to bring her business into our stable, specifically to ensure that she had the support to keep on working productively for as long as possible, and that her clients would not be left in the lurch. Sandy has a sterling reputation in KwaZulu-Natal, with some 25 years of experience as a leading independent financial advisor. She runs a substantial, established practice in Hillcrest, supported by a team of six.
In her own words: “My ethos is to deliver holistic financial advice to clients over the long term, and I want to continue as an independent advisor for the foreseeable future – but I also want to make sure that my clients continue to receive the same levels of service once I do retire. I have looked at many options, but the best one is the phased merger with GCI. I will continue to earn and service my client base while gradually transitioning my clients. It’s a win for me, for my clients and also, I believe, for GCI.”
Lack of a viable succession plan can spell financial disaster for advisors and their heirs, and it can impact their clients in all sorts of negative ways. But with sufficient thought and a good partner, there is a solution.
Succession crisis? What succession crisis?
About GCI Wealth
GCI Wealth is a boutique financial planning and investment group, whose mission is to Create Happy Families through Safe and Secure Retirement. www.gci.co.za
Tel: 011 768 1022
Sherma Malan, “Strong growth for SA professional financial planning industry”, 13 March 2017, available at https://www.fanews.co.za/article/intermediaries-brokers/7/general/1227/strong-growth-for-sa-professional-financial-planning-industry/21914.