Succession planning

In an industry where covering risks and providing for continuity after death, disability and retirement are some of the paramount principles, it is a mystery that advisers (especially sole proprietors, including only directors) do not provide for succession planning in their own practises. This accounts for most advisers who do everything else according to the book, but somehow ignore the fact that they will not always be there to serve their clients.

The determination of fit and proper requirements for financial service providers under the FAIS Act requires that a Financial Service Provider (FSP) must have a business continuity plan in place, while the General Codes of Conduct also requires that control procedures be put in place to ensure that the business can be carried on in an orderly an efficient manner.

While neither the Act nor subordinate legislation determines what such a plan should look like, it is obvious that it should be documented; otherwise it is just a dream. If you cannot prove to an inspector that you have a plan in your head, how would your executor or dependants be able to implement it if it is not written down? Even with a voluntary exit it becomes a nightmare to implement if you do not have a documented plan.

The first step towards a proper succession plan would be to decide whether the practice should be wound up or taken over by someone else. In both instances you would need to identify a trustworthy person to take care of the practice in the interim, since it is obligatory for any FSP to have a key individual in order to continue with business. While a young FSP might not find it necessary to identify someone for an exit through retirement, there must at least be guidelines in place to be able to identify someone quickly. As for death and disability an agreement should either be entered into with such a person or an employee should be identified and appointed as an administrative key individual. Even in the last instance it might be necessary to enter into a caretaker agreement with an external FSP to facilitate the transition.

An agreement with an external successor to take over a practice should be negotiated properly to ensure that all the many pitfalls are dealt with and that a smooth transition takes place that is to the benefit of all concerned i.e. the dependents, successor, employees and, most important of all, the clients. It is of the utmost importance that clients (and employees) be kept informed of all plans in this regard in order to make them feel safe.

It is not possible in an article like this to discuss the content of an agreement and all possible pitfalls, but certain realities should be born in mind when planning for a succession agreement. An agreement should by default deal with the following:

Who are the clients that need to be protected and for how long?

What is the minimum service level expected from the successor?

How will the purchase price be calculated to ensure that both parties get their worth?

How will the transaction be funded, and if a payment scheme is agreed upon, how will non-payment be dealt with?

What if the ‘purchased’ business falls away through attrition, especially where the purchase price is funded through ongoing fees?

There are certain pitfalls that should be considered when deciding on a succession plan and negotiating with a possible successor. These would include:

The necessity to match the successor with the client base. There must be a cultural (in the broader sense) match between the clients and successor.

Making sure that the successor will be acceptable to the FSB and all relevant service providers.

Ensuring that the successor is financially sound and otherwise fit and proper to provide the extended client base with the expected level of service.

Checks and balances to ensure that the outcome of the transaction is as expected.

Due to the complexity of a proper succession plan and the agreement(s) associated with it, it would be in an FSP’s best interest to involve an expert in the process from day one. Even if you feel comfortable with your own negotiation skills, do not draft your own agreements. A subjective approach is necessary to get the required outcome. Do not delay. Just do it.

Disclaimer: This document serves as a mere guide and should not be used as the definitive and only source of information in implementing any procedures in your business and for advising clients. Your due diligence must be done.