Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
Businessman coming down the stairs in office

Practice Management > Succession Planning

8 Steps for a Smooth Succession

By Richard Chen

X
Your article was successfully shared with the contacts you provided.

Surveys consistently point out that most RIAs are not prepared or are underprepared for a succession in the event of the death, disability or departure of the founder or other key personnel. In fact, fewer than half of RIAs have succession plans in place. 

Failing to proactively engage in such planning can lead to disaster for the firm’s founder as well as the firm’s clients and employees should key personnel  unexpectedly die or become disabled without a full succession plan in place.

While some RIAs may find it appropriate or necessary to find external parties to facilitate the transition through a merger or sale transaction, many prefer to transition ownership internally to existing next-generation employees. 

The following highlights the importance of succession planning, provides a blueprint for advisors seeking to develop and implement an internal plan, and highlights best practices for an internal succession.

Why Plan for a Succession?

A lack of a well-structured succession plan can put an RIA’s entire operation at risk in the event of the death, disability or departure of the founder or other key personnel. Below we highlight four key reasons why advisors should plan now for succession.

1. Succession planning is in the best interest of clients as it helps to ensure continuity of service in the event of the death or disability of key persons.

A well-executed transition instills confidence in clients, minimizing the risk of attrition during the transition phase.

2. Proper succession planning can help a firm’s founders clearly outline their goals for the eventual transition of their leadership as well as identify their personal goals with respect to the eventual succession.

3. Succession planning is often critical for the professional development and retention of key employees. Investing in their growth and development  not only prepares them for leadership roles but also fosters motivation and loyalty to the firm. This, in turn, nurtures a culture of growth within the firm.

4. A successfully executed succession plan can enhance the value of an advisory firm, making it more attractive to potential investors if the founder decides to sell equity to outside investors.

Key Steps in the Process

Transitioning ownership to next-generation employees is a multifaceted process that demands deliberate planning and execution. Below we highlight eight key steps that firms must take to plan for a smooth succession.

1. Identify one or more individuals within the firm with the potential to take on leadership upon transition. 

Firms should seek out candidates with not only the requisite technical skills but also strong leadership qualities, integrity, and a firm commitment to the organization’s values and clients. Founders should identify the roles and responsibilities that such employees should assume in the event of a transition.

2. Once potential successors have been identified, the founder should collaborate with such employees to create a development plan tailored to the firm’s and their specific needs.

This plan should encompass targeted training, mentoring and exposure to different facets of the business, including client management, operations, compliance and strategic planning, as appropriate.

3. RIAs should set clear expectations for the transition, with effective communication crucial during the planning process.

Founders should clearly articulate the benefits of the succession plan for next-generation employees, expectations regarding their roles and responsibilities, the timeline for management and leadership transition, and any specific performance metrics or milestones such employees are expected to achieve. Overpromising can lead to disappointment and perhaps the departure of key personnel.

4. Founders must adequately prepare clients for the transition.

It’s vital for firms to allot a sufficient amount of time before the transition to introduce key employees to clients and to help them establish and nurture relationships, gradually taking on more responsibility for client interactions. This will reduce the likelihood of attrition during the transition.

5. Founders must determine how next-generation employees will participate in the equity of the firm going forward.

Advisors should consult with attorneys and consultants to evaluate the best method for transitioning legal ownership over time to such employees.

This may involve the sale or gifting of equity upon a triggering event or over a period of time. Advisors must ensure that legal agreements, such as buy-sell agreements, protect all parties and address contingencies such as disability or death of the founder or other key personnel.

6. Before committing to a complete ownership transition, advisors should consider a trial period during which the employees gradually assume more leadership responsibilities.

This provides valuable insights into their readiness and identifies any areas that require further development.

7. RIAs should monitor progress of key employees and make necessary adjustments to the transition plan as necessary.

Founders should be open to feedback and address any concerns or challenges that arise during the process.

8. Once the founder and the succeeding employees are confident in the transition, the firm should proceed to finalize the ownership transfer in accordance with the legal agreements that have been prepared.

This may involve a formal buyout or equity transfer.

Even after the ownership transition is complete, founders should continue to provide ongoing support and guidance.

Best Practices

Numerous factors can affect the success or failure of a succession plan. Below we highlight four best practices that advisors should adopt in order to maximize the success of the transition. 

1. Advisors should commence succession planning well before the actual transition.

Often, the plans are conceived years or decades in advance given the time needed to undertake the numerous steps outlined in the preceding section and to change course in the event that developments occur that warrant changes.

2. Firms must involve key employees, management, clients and other stakeholders in the succession planning process to ensure alignment and support as the transition takes place.

Two-way communication is vital to ensure that all stakeholders are adequately heard and concerns are properly addressed.

3. Advisors should seek guidance from skilled legal, financial, and human resources professionals with expertise in succession planning to navigate complex legal and financial matters that arise in the process of developing and implementing the plan.

Failure to address legal and regulatory matters properly could lead to liabilities and roadblocks.

4. RIAs should maintain detailed documentation of the succession plan, including legal agreements, development plans and performance evaluations. 

Conclusion

Succession planning is a critical process that ensures the long-term viability and continuity of the investment advisor and is vital to ensure that the firm’s founder, key employees and clients are adequately protected in the event of the death, disability or other departure of the founder or other key personnel. 

By adopting a well-conceived plan, implementing best practices and avoiding common mistakes, advisors can maximize the likelihood that a succession plan will be executed smoothly for the benefit of all stakeholders. Effective planning represents an investment in the future that secures the legacy of the business and positions it for sustained success in the ever-evolving investment advisory industry. 

Richard Chen is a managing partner of Brightstar Law Group, a compliance and securities law firm serving investment advisors.

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.