A significant number of RIA firms are contemplating a change in ownership over the next five years.
However, a new study from Franklin Templeton finds that many firms are “woefully underprepared” when it comes to planning for the transfer of stewardship of their firms.
“As a client-centric approach is the hallmark of RIAs, developing a succession plan doesn’t always top the list of priorities, but it is actually one of the most important activities RIAs can undertake to address the future interests of their clients as well as their own,” Pierre Caramazza, head of the Private Wealth Division at Franklin Templeton, said in a statement.
Franklin Templeton released the study, titled Keys to Successful Succession Planning for RIAs, which included a detailed survey of 162 RIA leaders at U.S. firms ranging from approximately $100 million in AUM to upwards of $5 billion.
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The study found that the majority of prospective sellers ranked succession planning as one of their top professional priorities, yet many underestimate the time it takes to properly plan succession.
According to the survey, 41% of those surveyed identified themselves as prospective acquisition, merger or buyout candidates “who will eventually leave the investment advisory business.” Of those prospective sellers, 53% said they did not have a transfer of ownership plan or strategy in place and 11% said they had no plan to develop such a plan or strategy.
“By underestimating the amount of time and the expertise required to prepare for a transition, whether internal or external, many RIA leaders are at risk of suboptimal outcomes for their firm as well as for the future of their clients and employees,” the study states.
The survey also found that RIA leaders looking to sell, merge or otherwise depart the business are looking to do so in rather rapid fashion, with 50% anticipating such an occurrence within the next three years.
Psychology can also play a role in transitions, according to the study.
RIA leaders tend to overestimate the strength of their relationship with their clients, which then leads to them overvaluing their firm and underpreparing for their eventual exit.