Building a registered investment advisor (RIA) firm is an investment of your time, energy and passion, and it’s important to ensure that your legacy continues when you’re ready to step away from the business. Deciding who will take over your role and when to time your exit are some of the central questions to consider with RIA succession planning. Having a written plan in place can provide reassurance for your staff and, more importantly, for your clients.
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Importance of RIA Succession Planning
Succession planning is vital for ensuring that your RIA continues to thrive even when you’re no longer at the helm. With a comprehensive plan addressing all the questions that are likely to be raised by your exit, the transition can be completed as smoothly as possible.
Drafting a succession plan for your RIA firm is a form of risk management for the business. Who will take over your firm when you’re ready to retire may be the central focus, but your plan can address other scenarios, such as:
- Temporary absence of a key person due to illness, injury or other unforeseen circumstances
- Critical role vacancies if a key person makes an unexpected departure
Succession planning and business continuity planning often go hand in hand. For instance, you may have a separate continuity plan that outlines the necessary steps to maintain operations or close the business following a major natural disaster or other large-scale emergency.
RIA Succession Planning Strategies
Succession planning looks different for every firm, and it’s helpful to understand the pathways open to you when you’re ready to hand the business over to someone else. Here are some of the options you might consider when deciding what to do with the firm you’ve worked hard to build.
Option 1: Internal Succession
The first and most obvious choice in succession planning is having someone who’s already involved in the business assume ownership. Choosing an internal successor – whether it’s a partner, a junior advisor or an employee family member – eliminates the need to look outside the firm for someone who may be a good match for the business’s culture and values.
An internal successor is already familiar with how the business operates and what your clients expect. There are, however, some potential challenges to consider.
- How will you handle the compensation aspect of the transfer?
- Is your chosen successor likely to remain with the business for the long term?
- What’s your contingency plan if your chosen successor decides to leave the business before you?
Option 2: External Succession
Recruiting an external successor could make sense if no one in your firm is comfortable succeeding you, or you haven’t been able to identify a suitable candidate internally. The challenge lies in finding someone who aligns with your vision for the firm and is likely to continue that vision on your behalf.
Problems can arise if the person you choose is a mismatch with the culture you’ve created. If employee morale drops as a result or clients become dissatisfied with the type of service they’re receiving after you’ve moved on, it could hurt the firm’s reputation and threaten its long-term financial stability.
Option 3: Merge or Sell to an Aggregator
Merging with another RIA is something you might consider if you’d like to expand the services you offer to clients or leverage the resources offered by a larger firm. A merger could also make sense if you want to remain active in the business in an advisory capacity leading up to retirement, while someone else handles back office tasks.
Compatibility and clear expectations are critical in making this type of succession transition work not only for you, but your employees and clients, as well. You don’t want to put your employees in a situation where they risk being deprioritized or let go by the firm you’re merging with, and you don’t want to expose your clients to a company culture that might alienate them.
RIA aggregators buy existing businesses outright, but operate them separately. This approach may be preferable if you’d like to continue running the business within the aggregator’s framework while still maintaining some independence.
Option 4: Sell to a Third Party
Selling the firm outright is a fourth possibility for RIA succession planning if there’s no one to succeed you internally or you don’t want to try to recruit someone externally.
On the pro side, selling may yield the highest value for your business, at least in the short term. But the drawback is that you have less say in what happens to the firm after you sell. The buyer might continue doing business as usual, with no disruptions to your clients or employees, or they could shut the firm down. You could specify in the sale agreement any conditions you require for the business to continue, but that could make finding the right buyer more challenging.
Tips for Writing an RIA Succession Plan
Creating a succession plan takes time, as you’ll need to consider what you want to happen in your financial advisor business in both the short and long term. As you navigate the process, you’ll need to:
- Understand your firm’s unique strengths, as well as its weaknesses
- Weigh the pros and cons of each succession alternative
- Estimate your RIA’s market value and what it might be worth to a buyer
- Anticipate any issues or questions your employees and clients might have regarding the transition
- Determine what your life will look like post-transition and how much money you’ll need to retire comfortably, if that’s part of the plan
Working with a succession planning or business planning consultant can help you gain clarity on what it is you want to achieve and any potential blind spots that may exist in your current plan. You may also need to source an M&A expert to discuss the ins and outs of a merger if that’s your preferred path.
Once you’ve created your plan, it’s important to communicate it clearly to your employees, as well as your clients. Your clients, in particular, should feel comfortable coming to you with any questions they might have about who will manage their assets after you exit the firm.
RIA Succession Planning Mistakes to Avoid
Succession planning is a weighty task, and you want to make sure you’re doing it right. Certain things are best avoided as you shape a workable and realistic succession plan.
- Don’t wait. Procrastination is your enemy, as you don’t want to leave succession planning until the last minute. Retirement may be years away, but it’s never too soon to start thinking about what you want to happen with your business.
- Don’t leave employees in the dark. Your employees are vital to your business’s success, and if you expect them to continue the business without you, they must be prepared beforehand to do so. Transparency benefits everyone and helps employees feel confident about their future with your firm.
- Don’t forget about your clients. Trust is essential in client relationships, and you can’t have that if your clients feel blindsided by your exit. If you’re planning to retire, it’s important to make your clients aware well ahead of time so they have opportunities to ask questions and prepare themselves mentally for the change.
- Don’t assume you have to do it alone. Working with a business succession expert can be a wise investment if you’re worried about overlooking critical aspects of your plan or ensuring proper compliance. An expert can help you create a plan that’s comprehensive, yet flexible enough to be adapted should circumstances change before you’re ready to make your exit.
Frequently Asked Questions (FAQs)
What Are Succession Plans for RIAs?
Succession plans for RIAs are like succession plans for any other business, in that they’re designed to help you make a smooth transition when you’re ready to move on from the firm. RIA succession planning is designed to address the unique aspects of running an advisory business, including making sure that your clients and their assets are well-managed during the transition and afterward.
What Are the Key Steps in RIA Succession Planning?
Some of the most important steps in creating a succession plan for your RIA firm include evaluating your business’s strengths and weaknesses, choosing a succession path, drafting all of the documentation necessary to implement the plan, and informing your employees and clients about what to expect.
Do Financial Advisors Need a Succession Plan?
If you’re running an advisory business and want it to continue after you retire or otherwise move on, then having a succession plan matters. Without a clear plan in place, your employees and clients may be thrown into chaos and confusion should you decide to exit the business. A succession plan allows for stability as you move from one phase of your professional career to another.
Bottom Line
Succession planning is an insurance policy for your business, and having a clear plan can create peace of mind for yourself, your employees and your clients. You’ve worked hard to build your business, and creating a succession plan can ensure that those efforts don’t go to waste.
Tips for Growing Your Advisory Business
- Gaining new clients may be your firm’s top priority, but it’s important to balance that goal with serving the clients you already have. Working with an advisor marketing platform can make it easier to find leads without neglecting your existing clients. SmartAsset AMP helps you connect with prospects and gives you the tools you need to follow up. Schedule a demo to learn how you can leverage it to grow your book of business.
- Key person insurance is something you may need to include in your succession plan. This type of coverage is designed to insure key individuals in the business should they become disabled or pass away. Having a policy in place can help insulate your firm financially should you lose a critical team member.
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