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