Most advisors start off their practice solo and it is only after they reach a certain stage in their life when they think about their retirement. This is perhaps the most overlooked aspect in most advisors life.
Typically, majority of advisors in India get their family member to take charge of their business. But what if you don’t have anyone within your family to take over the reins?
There are three options available with you – sell or transfer assets, bring in a partner or institutionalize your practice.
Gajendra Kothari who runs Etica Wealth Management was not keen on joining his family business of hardware products. He floated his advisory practice which is also managed by his two brothers now. Gajendra says that succession planning is a major challenge for most advisors. “My family business involved selling tangible assets which is not the case with my practice. Even if I don’t join my family business customers will continue to buy products from the company. However, in advisory practice we are dealing with people’s financial lives. Clients may not be comfortable dealing with your successor. IFAs need to institutionalize their practice by hiring professionals so that the business continues in their absence,” explains Gajendra.
If you are running a proprietorship firm it would be advisable to turn it into a partnership firm or pvt. ltd once you call it quits.
Gajendra suggests that IFAs can sell their business by bringing in partners once they build a scale. “Today many professionals are joining the industry. They have quality relationship with their clients. Five years down the line large international boutique firms who wish to enter India can offer to buy out IFAs who are managing Rs. 300 – Rs 500 crore,” adds Gajendra.
Hemant Rustagi of Wiseinvest Advisors says that IFAs who operate individually face a major challenge in their succession. He advises IFAs to safeguard their family’s interest by adequately insuring their lives.
IFAs can nominate a family member but the nominee has to ensure that he/she continues to service investors. If clients decide to part ways then the nominee loses trail commission. Thus, advisors have to first evaluate the prospects of their business and see if any family member is interested in their profession.
“Generally solo advisors find it tough to plan their succession. Planning for dependents applies to everyone. This can be addressed by adequately insuring yourself. IFAs need to tell their family members about the prospects of their business. If family members are not ready to take over it is advisable to sell or transfer assets,” says Hemant.
Recognizing this unique challenge faced by IFAs, AMCs like Birla Sun Life, Reliance and Kotak have introduced retirement schemes for their IFAs. However this may not be enough.
“An ideal option for individuals is to corporatize their business or bring in a partner. Individuals may not get the kind of valuation they are looking for. Thus, it would be good if they turn it into pvt ltd which will help them fetch better valuation,” says Suresh Sadagopan of Ladder 7 Financial Advisories.
Clients and your employees may not like discuss about succession directly with you but it is advisable that you prepare yourself well in advance. If you have a family member who will take over your business you should make him/her familiar with your practice well in advance. Also, it would help if you introduce your successor to your clients so that the transition is smooth.
