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A succession plan benefits advisory firm and its clients


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In a time of record mergers-and-acquisitions activity for financial advisory firms, designing and implementing a succession plan has become a critical element for success.

This volume and breadth of M&A activity has increased the pressure on, and options for, firm owners.

According to the 2021 RIA Deal Room, the median valuation of registered investment advisory firms increased by more than 20% between 2019 and 2020. This has attracted attention from many well-capitalized investors, growth-oriented RIA platforms, and those who are looking to partner or buy advisory practices.

It gives firms unprecedented access to a wide range of economic models and degrees of control, as well as exit-timing options.

This is great news for firm owners. The options available for exiting a business have increased. Independent firms also have greater support to help them develop and implement succession plans.

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Although succession planning is crucial for the firm and long-term viability of the company, it is equally important for clients and investors. Clients should be concerned about whether their advisor has a succession plan. This is because this will impact who handles their money in the event that the owner of the company dies or retires.

According to Janus Henderson Investors’ 2018 survey, advisors are less likely to consider their succession planning options in the near future, but 73% lack a formal succession plan.

The industry is attracting a whole new generation of talent. This gives founders more options for transferring the company they have loved to grow to the next generation.

Advisors need to review and create succession plans for their businesses. This will give them more flexibility, as well as provide greater options. The lack of a solid succession plan can create confusion, misunderstanding and conflict that interrupts – or even disrupts – business continuity.

Succession planning defined

Planning for succession is the deliberate transfer of management, ownership, and goodwill from an advisory firm to another generation. It shouldn’t happen as a separate event. This event must be cohesive and include many elements.

  • Strategical planningThe process of defining a company’s vision, purpose, mission, and values. It also includes a strategy to help bring this vision to fruition.
  • Plan for the futureThe process of planning and preparing for an unexpected event.
  • Sale planningA process that prepares a business for sale.

As the RIA market grows, so does competition. While RIAs are attractive and have flexibility, there is no standard or uniform approach to when advisors need to leave the company or retire.

Succession planning is therefore a strategic benefit and addresses multiple areas of risk.

  • Client Attrition RiskHigh net worth clients, particularly those who have a lot of money, appreciate stability and continuity. They may choose to transfer to another company.
  • Growth riskThe risk of a business’s growth being stalled or declined by its owners is mitigated by good business management and succession planning.
  • Risk of staff attritionParticipating the next generation in succession and business plan will build a sense of engagement and foster a long-term relationship with the firm.
  • Enterprise value riskRIA valuations may be based on cash flows that are discounted or multiples of cash flows. Premiums and discounts can also be based on factors such as client demographics, revenue growth and the stability and quality of management. The attractiveness and valuation of your business could be negatively affected by a lack thereof.
  • Optionality riskThe owners will be limited in their options by not having a clear plan and waiting too long for one to develop. Advisor Growth Strategies estimates that it can take anywhere from five to ten years for internal succession to be completed, while a sale could take as long as two years.

Owners should set personal goals and targets to build a succession strategy. Do they want to create a legacy or maximize their financial income? Next, determine viable options for succession based on personal and business goals.

Firms should tap legal counsel to define voting rights for potential internal and external buyers, the event that will trigger succession planning execution — typically death, disability and/or age — the valuation methodology for internal succession and the buying party and funding source.

Also, owners need to determine when they plan on leaving the company. This will allow them sufficient time to sell the business or find an intern successor.

Do your due diligence and find the right buyer. You should define what matters to you and create an evaluation scorecard listing the opportunities, threats, strengths and weaknesses for each candidate.

Next, choose a deal structure and model. For this reason, some business leaders might hire an investment bank or consulting firm to represent them in negotiations.

It is recommended that the plan be reviewed at most once it has been finalized. Succession plans tend to have a longer time frame and need updates when conditions change.

Executing a succession strategy is crucial. The advisory firm will provide a comprehensive plan and clients will be able to continue monitoring the security and safety of their assets.

An effective plan is a powerful tool to increase your business’s competitive edge, attract clients, and retain them.

Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.