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Practice Management > Succession Planning

Ignore These Advisor Succession Trends at Your Own Peril

By John Manganaro

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What You Need to Know

  • A lack of succession planning by established financial advisors is emerging as a serious issue for the future of the wealth management industry.
  • Fortunately, firms that put the appropriate amount of energy and attention into succession planning can achieve success.
  • This is especially true when firm leaders are willing to ask deep questions about where the true value of their enterprise lies.

The lack of sufficiently sophisticated succession planning by established financial advisors is emerging as a serious issue for the future of the wealth management industry, and there is a real chance that the mass retirements of advisors in the coming decade will result in painful disruptions for firms and their clients.

In fact, according to Matt Matrisian, chief channel officer at AssetMark, the dearth of succession planning is one of the topics that comes up most frequently in his regular meetings with the leaders of different types of advisory shops — from the biggest broker-dealers to the smallest independent registered investment advisors.

Sitting down for a recent interview with ThinkAdvisor, Matrisian warned that many leaders in the advisor industry underestimate just how challenging it can be for firm owners and leaders to pass the baton to the next generation.

On the one hand, sourcing great next-generation talent is never easy, nor is instilling the leadership lessons that are required for the lasting success of any financial services organization. On the other hand, potentially thorny issues related to compensation and the financial aspects of firm ownership transitions can sour relations between today’s firm leaders and the leaders of tomorrow.

Fortunately, as Matrisian explained, firms that put the appropriate amount of energy and attention into the challenge of succession planning can reliably achieve success. This is especially true when firm leaders are willing to ask deep questions about where the true value of their enterprise lies.

A Growing Concern

Given the nature of AssetMark’s business in general and Matrisian’s role in particular, he has frequent conversations with advisory industry leaders who are looking to solve emerging challenges in their respective firms.

“I talk to a variety of different executives on a regular basis, and it has been eye-opening to see how frequently this topic of succession planning comes up,” Matrisian said. “Many of them ask me whether an organization like ours can help their advisors put together more effective continuity planning and succession planning.”

As Matrisian explained, forward-thinking leaders already know they need to get some type of plan in place to be able to protect their firm, protect their assets and help them to grow talent within their organization.

“However, because succession planning and the act of leaving the business is going to be such a personal issue for each individual advisor, that makes succession planning at scale a real challenge,” he explained. “So, that’s one interesting thing we are working on here at AssetMark — looking at how we can play a role in delivering more of a scaled succession model.”

Solving Problems and Building Value

According to Matrisian, the best way to achieve good outcomes in the succession planning effort is to think about succession not as an isolated topic, but rather to view it more holistically and from the lens of building sustainable enterprise value.

“For example, one tactic we have been discussing is that firms that are not already set up to operate in a hybrid RIA-BD model should seriously consider starting their own RIA and becoming a hybrid firm,” Matrisian said. “You can have investment advisor reps rolling up within that entity, and it creates an easier succession model, because as the RIA, you effectively have ownership of the underlying assets.”

Matrisian said he is also having discussions about the idea of hiring more W-2 advisors within RIAs, including both younger advisors who are just starting out but also older advisors who have established books of business that will need to be transitioned to the next generation in the years ahead.

“We’ve actually seen some firms take this one step further, and they’ve gone out and they’ve sourced capital and actually bought out bigger groups of advisors who then continue to serve as W-2 employees,” Matrisian observed. “This will be a very attractive opportunity for those established advisors who want to take some chips off the table but also still want to be involved.”

Another interesting approach he has seen is when a firm acquires a revenue stake in an advisor’s book of business as a means of starting a longer-term transition planning effort.

“Let’s say you are producing $1 million in new assets per year,” Matrisian proposed. “The firm can come in acquire, say, 20% of your revenue on those assets, and they will pay you up front between three- and four-times the revenue amount for that 20% stake.”

So in this example, the acquiring firm would cut a check for $600,000 in exchange for the collection of 20% of the ongoing revenue. This allows both entities to then jointly participate in the upside as the firm continues to grow, all while succession planning discussions continue to play out.

Matrisian said this is seen by some advisors as an attractive approach because it allows them to maintain 100% ownership of their firm while also taking some chips off the table and establishing a relationship with an entity that could actually acquire the firm in the future.

“If you want to turn around and sell to somebody else, the revenue stake then sells, as well,” Matrisian explained. “But, if you want to buy yourself out, you can just write the bigger firm a check for that original $600,000 down the road and walk away.”

As Matrisian pointed out, the firm that acquired this $200,000 can “drop it into the EBITDA calculation” of their office of supervisory jurisdiction, which expands the firm’s own margins.

“That’s the new and interesting thing here,” Matrisian suggested. “They are paying three times on the revenue, yes, but because of the size of their entity, they are probably valued at 10 times in the marketplace. So, they are getting an EBITDA arbitrage on the business, if you will, and at the same time they are locking that advisor in, because realistically, that advisor is probably not going to write that check back.”

Headwinds and Tailwinds

Stepping back from the topic of succession planning, Matrisian said the current moment in the wealth management industry is defined by both headwinds and tailwinds.

The tailwinds are powerful and somewhat obvious: Americans across the wealth spectrum have more investable assets than ever and they are in desperate need of financial advice. Further, they highly value the support they get from their advisors.

In addition to the fact that younger Americans are facing an ever more complicated financial landscape, Matrisian said, the wave of baby boomer retirements means more people are seeking support with growing and protecting their wealth.

“This is all great news for the advisory community,” Matrisian said.

Among his biggest concerns is the potential for an uncertain and vacillating regulatory environment to make it harder for leaders to make confident, clear decisions about business models and compensation structures.

“I also expect that, over time, we will finally start to see margin pressure in the advisory space like we have already seen in other parts of the financial services business,” Matrisian said. “Interestingly, I don’t think it’s going to be revenue pressure that is driving this, but rather the fact that individual clients are going to be demanding more — more services, more technology.”

Matrisian predicts that such pressure will push advisors to go up market and start to capture higher absolute revenue by working with higher-net-worth clients, or they are going to have to scale their offerings to be able to serve a higher number of clients at the same wealth level.

“So, the advisor that historically has worked with 120 to 150 clients is probably going to need to work with 200 to 250 clients,” he suggested. “Success is going to require investment in technology and, I think, more of a team-based model that outsources time-consuming tasks.”

(Image: Shutterstock)

John Manganaro

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