Succession planning for financial advisers

Relationships matter—even the one you have with your financial adviser. You go to her when you need to save for your retirement, for your kid’s marriage, to buy a house and sometimes even when you want to plan your holiday. She steers you away from crucial financial mistakes and also helps you in succession planning: to ensure that you bequeath in the right manner, so that after your death, your estate is managed in the way you wanted it to be managed. But what happens if your financial planner is suddenly no more? Or what if she chooses to retire?

Mumbai-based financial planner Gaurav Mashruwala was diagnosed and treated for oral cancer in June 2008. Two months later, while he was on his way to the New York’s Memorial Sloan Kettering Cancer Center for a second opinion, he felt a lump in his neck. The doctors there told him that his cancer was back, and had spread to his neck. Within 24 hours, he was back in Mumbai and had again started his painful struggle against cancer—another surgery and more radiation.

Apart from coming to terms with his illness, Mashruwala was also thinking about the 50-60 families whose money he was managing at the time, a corpus of Rs50-60 crore. “A lot of thoughts were in my mind, but I had also left it to God, as I knew I had done my clients’ financial planning in the right and ethical way. I continued to attend work even after the radiation, except for a few days when rest was absolutely essential,” said Mashruwala. Though Mashruwala has a staff of about five, including a senior financial planner who oversees the clients’ portfolios just like Mashruwala does, his firm is essentially a one-man outfit. When he had started out—and even today—there wasn’t anyone to take his firm forward in his absence. He has a daughter who is in her teens now.

That’s a dilemma (or a fact of life, depending on how you look at it) that not just financial advisers but most professionals such as lawyers and chartered accountants also face. Bengaluru-based financial planner Srikanth Bhagavat, too, faced this dilemma.

When he set up Hexagon Capital Advisors Pvt. Ltd as a leasing company in 1998, which he converted into a financial advisory firm in 1999, he wanted to institutionalize it. “I think it’s critical. There is a responsibility towards our client, our team and employees and our shareholders. I felt we have given a promise of continuity and growth to our clients and to fulfil this, I need continuity in my practice long after I am gone. We shouldn’t just service the present generation of my clients, but also the next generation. And for this, the keyman risk should not be there,” said Bhagavat. Today, Hexagon has a team of two people in research, four in the advisory division, and a separate back-office team.

Perhaps financial advisers can take a cue from other professionals like lawyers and chartered accountants. Hasmukh Shah, founder and managing partner, Hasmukh Shah and Co. LLP, a Mumbai-based chartered accountancy firm, started his firm in 1986 at the age of 21. Shah tells us that at the time he just “wanted to earn a livelihood”. But business grew and so did his firm.

In 1992, after the Indian economy was liberalized, foreign direct investment started to come into India and foreign firms started to set shop here. In 1994, Shah’s firm got its first international client, American Airlines, which had set up its liaison office in India. “Once you reach a certain level, you cannot grow at individual levels. We need to institutionalize the firm. I needed more ‘Hasmukhs’ in the firm,” said Shah. From a modest 150-sq. ft office in South Mumbai, Shah’s head office now sits in a 1,500-sq. ft space and employs 50 people across offices in Delhi, Bengaluru and Pune, apart from Mumbai.

When Ashish Bhakta, a Mumbai-based lawyer founded ANB Legal in October 2013, he also roped in two others within a span of 6 months after setting shop. One of them was Nazneen Ichhaporia. She tells us that the reason why Bhakta had decided to take in more partners was to ensure that if he wants to “start something else and move on”, the firm should continue to exist. But in the legal world, there is perhaps a more pressing reason to plan succession.

“A lot of start-up law firms have come up after senior lawyers left their jobs in big law firms and set up their own. These lawyers are already in their late 40s or early 50s. They are not going to continue doing the same thing for the next 15-20 years; they are already midway to their retirement. So, it’s crucial for them to plan to conserve and continue, whatever they have worked towards establishing till date,” said Ichhaporia, partner, ANB Legal.

“It should be okay if the adviser has documented the entire financial life of the client properly and the client has ready access to it,” said Sadique Neelgund, founder, Network FP, a firm that trains aspiring financial planners.

Mashruwala said that if investors knowingly go to a boutique firm, they know that they are going to an individual for his advice and that this individual will not be there after a distant point of time. “Think of all the leading doctors. Once they retire or pass on, would their patients be comfortable in automatically going to their children in the future, even though the kids may also be doctors? Some might, others might not be comfortable,” said Mashruwala.

Where boutique firms score over institutionalized ones, in some cases, is the personal touch that the former comes with. Shah doesn’t meet all his clients every year, only when it’s necessary. Owners of boutique firms maintain a one-on-one touch with all their clients. However, here too, some institutional firms try and retain a personal touch, though not as frequently.

Bhagavat, whose firm reviews of all the clients’ financial plans once every quarter, says he meets all his clients for their annual review. His firm takes charge of the quarterly review, but he meets clients if they insist.

Neelgund suggests that in case of boutique firms, two advisers can have some sort of an agreement to take over each others’ clients in case of any eventuality with either of them. Apart from institutionalizing, solo advisers may also have an option to sell their practices.

Internationally, such platforms exist, which value a financial adviser’s business and facilitate sale of such practices. In India, iFast Financial India Pvt. Ltd, a platform provider for independent advisers and mutual fund distributors, has launched a marketplace for distributors and advisers that seeks to facilitate mergers and acquisitions of their outfits.

Getting a good financial planner is crucial. But it’s also crucial to understand how long your adviser aims to remain in business, if the firm revolves around her.

While no one can predict the future, ask yourself: if you far outlive your adviser even in the natural course, what will you do if she retires?