In the 19th century, Charles Darwin said it is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.
In instances where managers leave their post, similar things can be said about businesses operating in the 21st century.
With departure dates seldom set in stone, advisory practices, dealer groups and funds management firms are increasingly seeing the benefits of having an exit plan for their leaders.
As has been the case throughout history, if there is no strategy to deal with the loss of a key figure and if a business is not prepared to evolve, the potential to fail increases.
Should someone the business is reliant on take up employment elsewhere, take a career break, retire, fall sick or pass away, businesses can fall into complete disarray.
While no-one in the industry argues that it is something that can be done overnight, industry heads agree succession planning provides a great safety mechanism in times of change.
It can ensure operations do not come to a halt and that the value of a business and how it performs is not affected.
In fact, industry heads say in a lot of cases succession planning can increase the value of a business, improve its performance and boost career opportunities for staff at the same time.
It can prevent satisfaction levels from plummeting and a mass exodus of staff and clients.
While many put the issue on the backburner to concentrate on the global financial crisis (GFC), succession planning is back on the agenda amid a time of political uncertainty and looming regulation.
Industry heads say with advisers jumping ship, dealer chiefs leaving to join rivals and portfolio managers exiting to go elsewhere, businesses everywhere are starting to take note that if they want to be able to cope with managerial changes, strategies must be in place.
Broker firm Kenyon Prendeville director Alan Kenyon says while many focused their attention on clients rather than succession strategies when markets collapsed, the GFC highlighted to advisory practices and dealer groups alike that succession planning needs to be a priority.
"The GFC brought home how vulnerable many businesses were without an exit strategy, which in turn I think has boosted succession planning on people's priority lists," Kenyon says.
"Considering the impact of the GFC and potential regulatory changes to come, a lot of older managers are also considering whether they want to make a swift exit or hang around to improve their succession strategies to increase the value of their businesses.
"Overall I think that current reforms and what they lead to will inevitably mean people will have to change what they do and how they think, and if they want their business to continue, they will need to find more creative solutions for succession going forward."
He says the current environment has also created an opportunity for lenders to come up with more creative packages to finance succession strategies.
"Standard packages won't cut it in the future and I think lenders that can create different ways to go about financing could get significant market share if they put their minds to it," he says.
Financial recruitment firm Profusion director Simone Mears agrees that fewer businesses were focused on succession planning during the GFC as most were in survival and recovery mode.
"Organisations were focused on revenue and the retention of staff and clients," Mears says.
"In a recovering market, however, people are getting back to business as usual and it is essential that they get back on track with formulating succession strategies as well. "While reforms and potential changes to legislation may not impact strategies dramatically, changes to the industry have seen a handful of people leave abruptly as some people would prefer to exit than hang around and work through the changes."
For this reason Mears says an organisation that does not have an effective succession plan can run the risk of failure if there is no strategy in place for others to step up.
Independent advisory firm Business Health partner Rod Bertino says in all market conditions a good succession plan can provide many benefits as shown in Business Health's analysis of around 2000 Australian advisory firms.
"According to our statistics, practice principals that have an effective succession plan in place earn more than double the profit than principals that do not," Bertino says.
"Despite this figure, however, it is very interesting to note that less than a third of Australian advisory practices are adequately prepared for succession. And by adequately, I mean the plan is written, reviewed regularly, that a successor has been chosen if the business is not being sold abruptly and that the successor has agreed to the plan and how it will be funded."
He says with the average age of a practice principal being 57, Business Health sees succession looming as a huge issue for the advice industry in the next five to 10 years.
"Because principals are aging, I think more of them are experiencing or witnessing health issues, which is making them realise they're not invincible and if they haven't addressed succession, it could leave their business, staff, clients and family in a bad situation," he says.
Kenyon says another important aspect is that the strategy is clearly communicated to clients as well as staff and other major stakeholders throughout the process.
"Having a succession plan makes all stakeholders feel assured about the future of the business. It instils confidence in staff, clients as well as others tied to the group," he says.
"It also gives potential buyers greater confidence. For instance, if Kenyon Prendeville took a business to market that had minority shareholders who intended to stay with the business as part of a previous owner's succession plan, it helps manage any perceived risks the buyer may be concerned about."
He says one of the fears a buyer has is that when the main adviser goes, will clients stay.
"If you have staff clients already know who are going to remain in the business or who have equity in the business, it gives everyone a greater deal of comfort," he says.
"On the other hand, however, there might be external buyers looking to own 100 per cent of a business and that might see a minority shareholding as an impediment, but for a lot of buyers, particularly in the current environment, it is real plus."
He says often the best succession plans are those where a business owner has recruited their replacement with expert support.
It is important they go through the strategy together as sometimes if it is someone internal, they may not want the head position or to own equity in the business, he says.
"You must sit down and get a market valuation on the firm and if an internal successor has been chosen, look at discounting the overall price for their years of contribution," he says.
According to Kenyon, in the current environment there has never been a better opportunity for aspiring business owners to become involved in a good practice.
"Business owners are putting succession to the head of the queue in terms of issues to address and with the industry going through dramatic change, principals are looking for advisers with the right energy and drive to take their businesses into the future," he says.
Mears says in her experience, internal succession when done properly can provide a lot of benefits, including better retention of quality staff.
"One of the top reasons why people leave organisations is a lack of career opportunity," she says. "That or they don't like their manager.
"They may also have qualms about being stuck in the same role and not growing or learning. They might want to do something different or earn more money and a good succession plan really can assist with all of those points.
"A person might be in a role they don't necessarily like for instance, however, if they can see that there is a pathway to another role or part of the business, it gives them something to work towards and perhaps a new skill set to develop in order to get there."
According to Mears, good businesses do succession planning at all levels.
"For example, you can have a succession plan for a chief executive of a dealer group, however, you might also have a strategy around their heads of and lead advisers as well," she says.
"Succession planning is not about necessarily taking the boss's job but rather creating different career avenues for staff and preparing them for greater responsibilities."
Essentially it can be the most effective retention strategy a business can have, she says.
"Succession planning develops expertise within a business, prepares people to take on more responsibility and creates opportunities. It lets staff know where they stand, where they are going and makes them feel aligned to the future direction of the business," she says.
"As a recruiter I can say people are also a lot less interested in leaving for another employer.
"When we contact people proactively and ask whether they're interested in a different career opportunity, it is always a lot harder to gain their interest in other businesses if they're part of an internal succession plan."
She says another factor to consider is if a leader departs and it has an impact on staff retention, then it is not unlikely the business may also face an issue retaining its clients.
"Not only does it ensure there is no loss of business continuity or intellectual property, but it minimises potential risks and reduces the seriousness of a departure," she says.
Bertino says according to studies conducted by Business Health, effective succession planning can certainly assist with the retention of clients.
"Out of the 40,000 clients we surveyed, 65 per cent said that at this point in time they wouldn't be comfortable dealing with anyone in the practice except their own adviser," he says.
While it is a considerable figure and one that poses a very real business risk, effective succession planning can assist the attitudes of clients quite significantly.
"To avoid a mass exodus of clients should they only want to deal with one specific adviser, it's important that advisers hold joint appointments so clients get to know other staff," Bertino says.
"Wherever possible, advisers should make in-house appointments so they can showcase their premises and get clients more familiar with other members of the team.
"Advisers should also consider the terminology they use, so, for example, rather than say what they will do as an individual, tell the client what the team will work to do for the client.
"They need to reinforce in clients' minds that the business is more than just one person and to ensure that they introduce key support staff at every opportunity, not just as a once off."
He says where appropriate, key advisers should also delegate tasks to other staff and have them call clients proactively so clients get used to dealing with other team members. If a practice is moving down the succession path, they should also make clients aware so they don't hear it on the grapevine, he says.
"You must communicate the changes with clients and put in place a relationship transfer plan so you can slowly introduce the new person or people over time and wean clients off their existing adviser or advisers," he says.
"You have to promote the benefits of your succession plan to clients and what it will mean for the overall business. You must tell clients what's in it for them now and in the future, and actively promote the advantages the succession plan will deliver."
According to Bertino, it is also important that any changes and succession strategies are also communicated to key referral sources.
"They too will want to know what the changes will mean for them and what the process will be to ensure they're still comfortable giving referrals to the business," he says.
Outside of advisory practices, industry heads say succession planning, while not as commonly spoken about, is equally as big an issue for dealer groups and funds management firms.
Genesys Wealth Advisers chief executive John Saint is just one example of where a dealer group has appointed a new head in the past 12 months.
Saint succeeded Greg Kirk, who departed in December last year.
From Saint's perspective, it was beneficial joining Genesys from ipac, where he was head of business partnering, as it was another Axa-aligned group, so he was familiar with the overall business.
"Having done a lot of work with advisory practices on their succession plans at ipac, I can say that succession planning is definitely not an issue exclusive to advisers alone," he says.
"It's something that must be considered at a dealer group and industry-wide level as well."
He says succession can also sometimes be simpler for larger groups as there is not so often such a large gap in expertise between the top person and the next level down.
"In instances where you might have a small practice or small dealer group, there might be less potential candidates internally who can step up into the role," he says.
"A lot of smaller dealer groups and practices have a lot of single-person dependency and it's a big issue, however, the bigger the business the more robust its plans and strategies can be."
It's important that a business looks at succession not only at a chief executive level but at an executive level as well, he says.
"You must have people in place and make sure you have options so that you don't back yourself into a corner. The bigger and better the team is under the chief executive, the more successful a succession strategy can be."
He says coming across to Genesys from another Axa-aligned business had its advantages.
"I knew the people and the way they went about doing things, which made the transition from ipac to Genesys a lot smoother," he says.
According to Saint, the succession process for the head of a dealer group is not that dissimilar to planning for the exit of other lower-level executives.
"A business wants to make sure it chooses someone appropriate and that has an attitude that is aligned to the culture of the business and who is going to be a good fit," he says. "In saying that, however, there is still opportunity for a leader to step up and put their own touch on things.
"While it is important that a new leader or executive team for instance understands the strategy and direction the business is headed, it's still important that a new owner is not a clone and that they can put their own mark on things while staying true to the business."
While Saint and Kirk had less than three weeks to do a handover, Saint says his industry experience and time at Axa was beneficial.
"I also used some of that time to visit member firms and speak with staff as communicating the change to all involved is a very important part of the overall transition," he says.
"It was also invaluable having a good executive team behind me as they were able to take care of a lot of the operational stuff while I dealt with business relationships.
"Getting to know the members and strategic partners is not something that can be done overnight, but something that is an ongoing process."
He says he too believes that succession planning can have a good impact on retention.
"It can create a bit of tension and competition as to who might be next in line for a role, and while time frames might not match people's aspirations, it does provide great opportunities for personal growth and development," he says.
Morningstar co-head of research Chris Douglas says the succession plans of fund management firms are also very important from the perspective of research houses.
"When a portfolio manager leaves, planning is just as critical within a funds management business as it is within a financial planning practice," Douglas says.
"For that reason it's vital that fund managers always have people coming into the ranks and that they are being given opportunities and promotions along the way so that someone can fulfil a position quickly and adequately should someone exit the firm."
He says a fund manager with a good succession plan will have a program in place to ensure people can be promoted quickly or external candidates recruited promptly to ensure investors and their investments are not affected.
"There is not one perfect way to construct a succession plan, however, I can say that the best ones are those where people can grow in the job and further their careers," he says.
"Those firms that are heavily reliant on one key individual and that don't allow others in the team to grow, often find that people will leave to fulfil their career path elsewhere.
"There are always situations where portfolio managers might be poached, get an illness or take up employment at another firm, so there needs to be measures in place so an adequate replacement can step up and run investors' money quickly."
He says while some do a great job, there are those that don't and they have to rely on poaching from other firms to keep operations running.
"One example where a business did not have a succession strategy in place nor could recruit new experts to the business in time was Invesco Australian Equities in 2007," he says.
"The head of equities and his second in charge who had been there for 10 years and put together one of best performance records in the business, departed and with no succession plan in place, you had a fund that had a couple of billion dollars shrink to just a few hundred million within months.
"After the departure of those two people, clients then rushed out the door to go elsewhere and today the fund is just a shadow of its former self."
He says that's why a research house will question a fund manager's succession plan and how the second tier of an investment team is performing. "Where a fund manager gives an analyst or future portfolio manager a small portion of clients' money to manage, with risk controls in place of course, it gives us confidence that the firm believes in that member of staff," he says.
A research house is also interested in what the back-up plans are should a portfolio manager go on holiday or leave, he says.
"We want to understand the knowledge base that exists right throughout the firm," he says.
"Having knowledge of how staff members are remunerated and whether they are offered long or short-term incentives or incentives where they are locked in for a period of time are also things we ask. And if a staff member has equity in a business, that is also a positive sign."
Perpetual Australian Equities is one of the biggest Australian equities teams and probably one of the best succession planners for all the reasons mentioned, he says.
He says succession plans can create more experienced and knowledgeable teams and in turn can help a fund manager to attract more assets and be a more attractive business.
"In most cases, businesses that are consistent and which have stable teams outperform their peers," he says.
"From our perspective it is easy to identify whether a business is key-person dependent and when that is the case there are more associated risks and the probability that money will rush out the door is a lot higher."
He says businesses have to recruit well and not have all their eggs in one basket.
"There is always the potential that you won't recruit right, but having a strategy and good team of people that are constantly developing will definitely reduce any risks," he says.
Kenyon agrees and says bringing on board the wrong person can create massive problems for a business, which is why the appropriate divorce clauses must be in place.
"The courts are full of disputes with disenchanted partners and it is both messy and expensive," he says.
"Clients, staff, partners and stakeholders across the board can suffer, which is why businesses must make sure an exit can be done as simply as possible if things don't work out."
Industry heads all agree that at the end of the day succession planning is an onerous task, however, if done properly none deny the massive advantages it can have for a business.
