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RIAs ‘Woefully’ Unprepared in Succession Planning: Franklin Templeton

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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.

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.

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According to one self-identified potential buyer of RIAs interviewed in the study, “the industry is woefully unprepared, and ego is one of the biggest things that gets in the way of people being able to transition their business to somebody else to own it, and run it, and continue to take care of their clients beyond their career.”

Meanwhile, potential buyers are looking to capitalize on sellers’ “need for speed” brought on by poor planning. These potential buyers are also willing to wait for valuations to decline, perhaps driven by a downturn in the markets’ fortunes, according to the study.

The majority (79%) of potential buyers surveyed admitted to being an opportunistic acquirer, meaning they’re “likely to acquire or merge with an advisory firm only when presented with a very good opportunity.”

“RIAs looking to grow via acquisition or merger recognize that the numbers say it’s a seller’s market, with would-be buyers far outstripping would-be sellers,” the study states. “However, given lofty current valuations and increased competition from other corners of the market, they are opportunistic rather than serial acquirers, by a 4-to-1 margin.”

Just 12% of potential buyers said they are serial acquirers, using multiple acquisitions/mergers as a source of growth in assets under management, revenue and profits.

In order to optimize negotiating power and position for the best possible outcome, the study suggests, RIA firms need to better understand what is most important to prospective buyers.

According to the study, many buyers want to know that would-be sellers have a next generation of talent and firm capabilities in place. This places emphasis on the need for RIAs to institutionalize their firms; however, according to the study, only 11% of prospective RIA sellers said that institutionalizing their investment process and building in-house investment management capabilities are among their three highest priorities over the next three years.

“Potential sellers seem to believe that their succession planning, or lack thereof, will have little impact on the potential pool of transaction partners,” the study states.

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