RIA succession tips for all seasons

An established, well-thought-out succession plan is crucial to an RIA’s seamless transition and future growth. Yet more than a quarter of independent advisors have no plan in place and, according to DeVoe & Company’s RIA M&A Outlook Study, more than half of firms say that a transition from the leaders to successors would be difficult.

A strong succession plan ensures that there will be no gaps in service to clients no matter what eventualities occur and that the founder, CEO, or one of the partners departing their firm can be confident they are leaving it in the best position for continual success.

After all, advisors succession-plan their clients’ wealth, so why not their own firm?

Planning essentials
First and foremost, the plan should at once be concrete and flexible. At the very least, advisors should create a contingency buy-sell agreement or a key-person insurance policy that will cover any sudden, unexpected transition resulting from illness or accident. Moreover, if there is an internal succession planned, that too should be documented with the terms for the cash purchase or payout over time clearly described.

Some firms specialize in assisting with transition planning, so advisors may want to consult with them as plans are developed. In any case, a plan detailing the nature of the transition should be on the shelf ready for any contingency.

Planning as recruiting
It is important to be proactive in planning for succession. Advisors need to know what roles in the firm are vital and must remain filled, regardless of whether the transition is to be from within or external. Firm leaders should identify key roles and necessary skills the firm can’t do without to ensure it is always ready for a transition.

Once key roles are defined, recruit with the goal of filling those requirements. Recruiting should also be part of the planning process itself. As the succession plan solidifies and nears implementation, recruit those whose strengths are perhaps a little greater than are needed for that particular position. In other words, today's "overqualified" hire is tomorrow's "capable choice for a promotion."

Also be aware of staff retirement plans and make recruiting for their replacements part of the transition plan. Consider whether new senior recruits are looking for an opportunity for an internal buyout and, if so, whether that does or does not add to recruits’ value to the firm and vice versa.

Importance of institutional memory
Many employers remain unfocused regarding what age-55-plus workers take with them when they retire: institutional memory, which is the why and how of the way things are done at their firm. Allowing for the transference of that knowledge in a succession plan can be key to a successful transition and is essential to the firm’s ongoing success.

All of this planning and preparation will allow for the smoothest possible transition for an RIA and its customers. Roles will always be filled and staff will stay in place, knowing that increasing responsibility and leadership are available to them as desired. Additionally, clients will never be faced with a potentially unpleasant transition.

An RIA founder or leader with this kind of planning in place can transition confident that their life's work will provide its rewards to the seller and continue to operate successfully for the successors and clients.

Think about the valuation of the business
When valuing an RIA for succession purposes, it is necessary to consider how to make the transition — succession buyout payouts over time, cash private equity, external buyer, etc. One major hiccup in the succession field today is unrealistic overvaluations of firms. Remember, it is better to reasonably value a firm than to be unable to implement a succession plan. As with transition planning, there are third-party services that can help with valuation, but there are also formulas to base a valuation upon, so long as the value is realistic and sellable.

Smooth transitions in the end
All of this planning and preparation will allow for the smoothest possible transition for an RIA and its customers. Roles will always be filled and staff will stay in place, knowing that increasing responsibility and leadership are available to them as desired. Additionally, clients will never be faced with a potentially unpleasant transition.

An RIA founder or leader with this kind of planning in place can transition confident that their life's work will provide its rewards to the seller and continue to operate successfully for the successors and clients.