Succession planning for independent Registered Investment Advisors (RIAs) is a critical strategy that ensures the sustainability of the firm and the continuous servicing of clients. A looming “succession crisis” in the RIA industry underscores the necessity of such planning, as over 60% of RIAs are still led by their founders, yet many have not prioritized developing a succession plan. The planning process is often complicated by the emotional aspects of transferring client relationships and the risk of devaluing the practice if not done timely and effectively.
Internal Succession Planning
Internal succession, where leadership and ownership transition to the next generation within the firm, aligns with the preference of many RIA owners to maintain independence and provides clients with continuity. This requires founders to handpick their successors and future leadership, often involving a gradual transition of responsibilities and ownership. The internal approach can better align employees’ interests and foster firm growth to the benefit of all stakeholders.
Developing internal successors can be a structured process involving the identification of candidates within the firm, setting career goals, and providing training and incentives. It also entails regular evaluations and updates of the succession plan as the business and market dynamics shift.
External Succession Options
External succession options include outright sales or recapitalization. An outright sale allows for immediate liquidity and retirement but may require a transition period for smooth client transfer. Recapitalization, where owners sell a portion of the firm but stay involved, allows for liquidity while maintaining client relationships and potentially achieving a higher valuation over time.
Succession planning should begin with a clear articulation of goals and an assessment of the firm’s current value. This includes evaluating both hard metrics (like fee-based business percentage and average fee) and soft metrics (such as client demographics and future growth potential). A thorough valuation can aid in planning for post-retirement financial security and inform the decision-making process for either an internal or external succession plan.
Key Considerations for RIAs
Valuation: Before any succession, understanding the firm’s value is crucial. This means assessing the percentage of fee-based business, the average fee versus commissions, and the services provided.
Client Demographics: Consider the age mix of clients and strategies to serve the next generation. Building relationships with clients’ children can catalyze growth and prevent revenue slowdowns.
Emotional Factors: Addressing the emotional challenge of client transfer is important. Nearly 75% of advisors find this emotionally difficult, highlighting the need for a thoughtful transition process.
Market Dynamics: RIAs must be aware of the robust deal-making in the industry, which could influence the timing and strategy of succession planning.
Ultimately, successful succession planning for RIAs entails a comprehensive approach that considers the unique aspects of the firm, the well-being of clients and employees, and the personal goals of the owners. Whether through internal development or strategic external sales, the objective is to ensure the longevity and prosperity of the RIA’s legacy.
For an independent Registered Investment Advisor (RIA), making the best decisions for their clients while planning for succession involves several key steps:
Client-Centered Succession: The succession plan must prioritize client welfare, ensuring that the transition is seamless and the quality of service remains high. Advisors should consider the cultural fit between their clients and potential successors to prevent “culture shock” and maintain trust.
Maintaining Service Continuity: Whether through internal succession or an external sale, RIAs should focus on maintaining continuity in client service. This can mean gradually introducing clients to potential successors well before the transition.
Access to Enhanced Services: An external sale can offer clients additional resources, such as advanced technology, broader investment options, and comprehensive planning tools. Independent RIAs should weigh these potential benefits against the value of maintaining the firm’s independence.
Valuing Relationships Over Transactions: The advisor’s relationship with clients should be at the heart of succession planning. This means ensuring that successors, whether internal or external, share the same values and commitment to client relationships as the founding advisor.
Open Communication: Advisors should communicate their plans with clients and involve them in the transition process. This transparency can help alleviate concerns and reinforce the clients’ trust in the firm’s future.
By prioritizing these elements in their succession planning, independent RIAs can make decisions that uphold their clients’ interests and preserve the legacy of personalized, client-focused service that characterizes many independent advisory practices.