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Practice Management > Building Your Business

The Not-So-Great Escape

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The escalation in the number of financial advisory practices and the seasoning of the advisor population have been two of the most notable trends in the advisory industry in recent years. According to the June 2007 report “Evolution Revolution” from NRS and the Investment Adviser Association, about 520 new investment advisory practices on average have debuted every year since 2001. The folks running new and established advisory practices are older and more experienced. The advisors who participate in our survey have a mean age of 53, though some are quite a bit older. About one third (33%) of financial advisors began their business 16 or more years ago, when the industry was in its infancy. Now, many of those financial professionals are looking toward retirement. As a result, the unavoidable issue of succession planning has become crucial to advisors.


However, when analyzing the multiple responsibilities advisors face, succession planning is an often overlooked issue. About a third (32%) of advisors don’t have a succession plan and are in danger of losing their competitive positioning to companies with future-ready planning. “One of the challenges investment advisors face is planning long-term firm survivability. It’s especially true among smaller firms with fewer choices for replacing principals. These firms have more difficulties attracting and retaining staff,” says Lane Johns from Evensky & Katz Wealth Management in Coral Gables, Florida.


By examining the types of succession plans that are most appealing to advisors, there is an interesting trend. Most RIAs with succession plans would prefer to sell their practice to an existing partner (29%) or existing employee (12%). The takeaway here appears to be that advisors would prefer to sell their business practices–their largest financial asset–to someone they know and trust.

Follow the Leader?

As advisors first think of leaving their practices, they typically start to ponder the legacy they’ll leave, wondering who will be the new leader of their firm when they step down. Therefore, mentoring younger advisors is absolutely vital. The next generation of financial professionals expects to see a clear career path and opportunities to grow. To potentially take charge of a firm in the future and run it effectively, younger advisors need a thorough understanding of the ins and outs of running an advisory practice. Today’s older principals need to think about appropriate candidates to run their firm in the future and provide suitable training for potential business owners. The good news is that in 2006 advisors stepped up to the plate in providing employees with career growth opportunities. Advisors took the initiative to create more mentoring environments for their employees–such as boosting employee industry knowledge through seminars (46%), sponsoring employees for continuing education courses (35%), and developing internal education programs (35%).

Preparing for a Potential Sale

In contrast to the advisors who want to sell to a known entity, about one fifth (18%) of financial advisors are considering selling their practice to a third party. For those professionals, practice valuation and preparing a business for a potential sale have become important topics over the past few years. But if in the past basic growth revenue multiples worked well for valuation purposes, it’s now becoming more important to plan ahead for exiting the business and take extra steps to get ready for a potential sale. Our research shows that about a third of advisors (32%) are preparing by creating standardized practices for an easier transition, 32% are seeking to increase profitability to make the business more attractive, and 27% are focusing on having a more profitable client base. However, many advisors (40%) are not doing anything to prepare their business for potential sale.


The bottom line? Whether you plan to leave your business a year or 10 years from now, and no matter the size of your firm, planning for your firm’s future is essential. A few tips for getting started on a succession plan include:

- Make succession planning a part of your regular business strategy and planning.

- Benchmark yourself against your peers. It will give you a better assessment of what your firm might be worth, as well as some ideas on how to enhance tjat worth. There are a number of services available to you to get a general idea. One is–a Web site dedicated to assisting financial professionals value, protect, and buy or sell their practices.

- Plan ahead. No matter what your circumstances, you should have a succession plan or exit strategy in place. If you plan on selling, create a game plan for determining your firm’s worth, set a timeline for exiting, identify potential buyers, and consider ways to enhance your business model to make it more attractive. Sellers with succession plans in place enjoy a smoother exit process.

Maya Ivanova is a research analyst with Rydex, an affiliate of Rydex Investments. She can be reached at [email protected].

If you would like to receive any of the following research reports via e-mail, please contact [email protected].

The Advisor Confidence Index monthly release;

AdvisorBenchmarking’s Comprehensive Analysis of the RIA Marketplace Study;

AdvisorBenchmarking Media Exposure Series.

To receive a customized benchmarking analysis of your practice, visit the free online tool

AdvisorBenchmarking, Inc., an affiliate of Rydex Investments, is a research and analysis center focused on the RIA marketplace Through its web site,, the firm conducts multiple advisor surveys every year covering a host of business management and investment-management practices. The findings and analysis of the data are then released to the marketplace in the form of annual studies, quarterly research notes and monthly newsletters. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors, as well as learning best practices of the most successful advisors.


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