Data & Research May 15, 2012

Planning for a Succession? NFP Study Explores Maximizing Practice Value

 

NFP Advisor Services Group published a study that tells advisers how to maximize the value of their practice across various time horizons in advance of succession.

 

 

Reported by

“Advisers who plan ahead and focus on enhancing the value of their practice—with an emphasis on driving revenue up and keeping costs down—will be best positioned to optimize the trade-off between risk and return to achieve the best possible outcome,” said James Poer, president of NFP Advisor Services Group.

Nearly 70% of practice owners believe a successful transition will take five years or less to implement from the time a succession strategy is chosen to the time they can leave the practice, the study found. Merger and acquisitions (M&A) consultants, however, suggest 10 years before a planned transition as the optimum time it will take to maximize the value of the practice.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Since many advisers do not have a full 10 years to plan a practice succession, the study suggests three steps to improve the value of a practice and effectively plan a succession.

Advisers with three or more years before a transition can enhance the valuation of their practice. Advisers typically think in terms of revenue or assets under management, and often turn a blind eye to expense management. Practice buyers and M&A firms, on the other hand, use normalized earnings to value a practice based on its profitability. If this is addressed early enough, many components that drive practice valuation can be influenced in advance of a succession event. If the weak point of a practice is its technology and operating model, consider migrating to a different infrastructure or to an outsourced technology platform. If an aging client base is the issue, make a concerted effort to win younger clients.

Advisers with fewer than three years until practice transition should focus on mitigating existing risks. The focus of the last three years before a transition is enacted should address existing risks, such as employee retention post-transition and having a practice valuation completed by a qualified consultant. There is also time to implement streamlined technology that will be turn-key for the buyer. At that point, much attention should be on tactical measures for implementing the chosen succession strategy.

 

(Cont’d…)

It is imperative that advisers focus on client retention, regardless of where they may be in the planning process. Client retention is the top challenge for 22% of advisers that acquired an existing practice, well ahead of the financial side of transactions, such as obtaining deal financing. Accordingly, practice owners should aim for a client retention rate of 90% or higher by concentrating on client satisfaction both before and after the succession event, with a strategy in place that provides clients continuity for investment management, account access, reporting, product selection and communication.

The study also reveals that while a staggering 40% of practice owners anticipate a succession event within the next 10 years, only one-third of all practice owners have a plan in place. Moreover, among the two-thirds of those practice owners without a succession plan, 54% do not know the value of their practice.

 “Succession planning is an important aspect of the wealth management industry, particularly at a time when one in ten financial advisers is over 60 years old,” Poer said. “Just as advisers utilize the efficient frontier to help maximize investment outcomes for their clients by optimizing the balance of risk and return to fit a client’s time horizon, it is critical that they apply similar thinking to help maximize the results of their own eventual practice succession.”

“The Efficient Frontier of Succession: Maximizing Practice Value,” commissioned by NFP Advisor Services Group and produced in March by the independent research firm Aite Group, is based on a survey of 227 practice owners and interviews with buyers of adviser practices, brokers of practice sales and consultants in the adviser marketplace.

The study can be requested here.

 

Data & Research May 15, 2012

Positive Language Critical in Reaching Older Americans, Research Finds

 

The language advisers use is critical in reaching senior citizens to explain investment products, according to the research firm Hearts & Wallets.

 

 

Reported by

Aging investors recognize they may need to tap into accumulated savings rather than relying solely on work income. Yet older Americans talk about becoming “unemployable” instead of retirement.

“Pre- and post-retirees ages 53 to 75 don’t see themselves as senior citizens, a term they perceive as referring to sedentary or really old people” said Chris Brown, a principal of Hearts & Wallets. “Even though they may technically be eligible for senior discounts, they prefer language with positive associations to describe this time in their life. They get to do what they want and have more freedom. Financial services firms and advisers that use positive wording associated with freedom will have a stronger connection with this market segment.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Three Major Types of Older Investors 

Aging Americans are  not all alike in how they want to balance work and leisure. The latest Hearts & Wallets Explore study, “Shining a Light on Pre- and Post-Retirees: What 3 Different Retirement Lifestyles Reveal about Language, Attitudes and Experiences with Advice and Retirement Income,” is drawn from nationwide focus groups that divided older investors into three main groups according to preference:

1) Full Steam Aheads—Plan to work at least part-time, to avoid mental deterioration and keep options open.

2) Balancers—View part-time work as an insurance policy for the future and a way to earn spending money.

3) Leisure Pacers—Plan to stop working (or already have), but are more involved with their finances now than ever before.

“It’s critical that financial services firms know their audience,” said Laura Varas, Hearts & Wallets principal. “Not all pre- and post-retirees have the same goals. Flexibility in messaging, financial plans and retirement income calculators are important to attract these investors.”

The study found a big risk in using inappropriate language. “The term ‘retirement income’ means three wildly different things to different types of older investors,” Varas said.

“Many firms think of ‘retirement income planning’ as a service that helps older Americans plan how to take income from their personal assets. But using one lifestyle segment as an example, Full Steam Aheads often think the term ‘retirement income’ refers to ‘entitlements,’ like pensions or Social Security. Since they tend to take responsibility for themselves and others, they don’t even think ‘retirement income’ applies to them. This misunderstanding is a tragedy, because many of these offerings are specifically designed to help people like them.”

 

(Cont’d…)

The Myth of Asset Consolidation 

Two factors signal trouble for financial service firms counting on retiree asset consolidation as prime new business opportunity. Many older investors established relationships with financial advisers when they were in their 40s. They also express a reluctance to consolidate assets with one firm. Only a minority of older investors will consolidate with a single provider.

“Retirement income services may help providers increase wallet share,” Brown said. “But they need to be careful about asking for everything. And they need to understand trust drivers and eroders.”

Investors have had bad experiences with advisers who put their own interests ahead of the client’s. Some still work with an adviser but put in extra hours checking up on adviser recommendations.

A few key trust drivers include an adviser who takes the time to get to know the client, and offers reasonable and clear fees. One of the key trust eroders is staff or adviser turnover. The study also details how investors connect with financial services providers and advisers. Many investors met their provider or adviser through a workplace retirement plan.

Receptivity to retirement calculators is mixed. Many like the ability to try on different decisions before actually having to make them. Others see them as rigged, prompting the investor to put more money into funds than is necessary.

Investor Receptivity to Three Retirement Income Concepts 

The study examined techniques older Americans are using to generate retirement income today, their likes and dislikes, and language that might support optimal income solutions.

The study explored how older Americans are currently executing three popular techniques: establishing a guaranteed “Income Floor,” breaking up assets into time-based buckets that can be used in different periods of life, and sustained withdrawal, or seeking to take income from an overall diversified portfolio. The different types of older investors provided detailed responses to these concepts as well as a trust-services concept. There were some signs of thawing attitudes to annuities, which can fulfill an important economic function of providing steady income and pooling longevity risk. Unfortunately, consumer misfortune with poor business practices, such as over-engineering or excessive fees and sales commissions, means resistance runs deep. On the other hand, the 403b is perceived as positive, and the term income annuities does not hold the same negative connotations as annuities.

 

 

 

«