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Succession Planning: RIAs Need a Well-Planned Exit Strategy: Practice Edge, October 2009

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RIAs are adjusting their professional practices in many ways to deal with the tough economy. While succession planning should be an essential part of this retooling, it’s something advisors tend to overlook.

Our research reveals that the seasoning of the advisor population has been a notable trend in the advisory industry in recent years. Investment advisory practices are established and experienced–about half of financial advisors have been in the advisory business for at least 10 years. For the last two years, the average age of an RIA has been around 50. For the many RIAs who are close to retirement, having a good exit strategy is a crucial business practice. However, our study findings reveal that advisors often ignore the key role of succession planning in building and protecting their business from the start.

Of the advisors surveyed, 36% don’t have a specific planned exit date and almost as many (34%) indicated they are not planning to exit the business in the next 10 years. Only 9% said that their timeline to exit the business is in the next four to six years.

In the face of one of the most challenging markets seen in the last century, 16% of advisors have changed their exit timeline from the business. While 14% have pushed their timeline back, 2% have actually accelerated their planned departure.

One-fourth (25%) of advisors don’t have a succession plan and, as mentioned earlier, 36% don’t have a specific planned exit date. Why should they be concerned? Because these RIAs are in danger of losing their competitive positions to firms with future-ready planning.

The advisory business runs on relationships. Clients value the exemplary service of their individual advisor–and these long-term relationships are an invaluable part of the ongoing success of the practice. One of the challenges investment advisors face is planning for long-term firm survival. This is especially true for smaller firms, which have fewer choices for replacing principals. It’s important to ask early: Do your clients know who they are going to work with when it’s time for their advisor to exit the business?

RIAs Are Planning…

Most RIAs with succession plans would prefer to sell their practice to an existing partner (27%) or an existing employee (15%). The takeaway: Advisors prefer to sell their business to someone they–and their clients–already trust. If you plan to sell your practice to an existing partner, good succession planning will include introducing him or her to current and potential clients now–no matter how long it is before you plan to retire.

The financial advisors who are considering selling their practice to a third party face (29%) slightly different issues in succession planning. For them, practice valuation and preparing a business for a potential sale have become important topics over the past few years. Although basic growth revenue multiples worked well for valuation purposes in the past, the volatile economy has made it more important to plan ahead and take extra steps to get ready for a potential sale.

Making an Exit Plan

What about the 25% of advisors who are not doing anything to prepare their businesses for potential sale? Whether you plan to leave your business one year or 10 years from now, and no matter the size of your firm, planning for a future without you is essential to keeping your clients happy today. Here are a few tips for getting started on a succession plan.

l Prepare for your exit ahead of time. Make succession planning a part of your regular business strategy and planning–long before your planned departure date.

l Know your worth. Benchmark yourself against your peers in the marketplace. It will give you a better assessment of what your firm might be worth when you are ready to sell it, as well as some ideas on what to do now to enhance its value in the future.

l Tell your clients. Introduce your clients to your partner if he or she will run the practice after you retire.

Succession planning is an important long-term business strategy in the new market environment. You can benefit when you plan ahead for your own retirement as well as for that of your clients.

Maya Ivanova is a market research manager with Rydex|SGI AdvisorBenchmarking She can be reached at [email protected].

Rydex|SGI AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors. Advisors also learn best practices of the most successful advisors in the business.

AdvisorBenchmarking is an affiliate of Rydex|SGI. The analysis on Rydex is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general in nature, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Rydex Investments|SGI and it affiliates or any of its affiliates.


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