The big succession planning questions RIAs need to answer immediately

Determine the fate and future of your business before the regulators force you to

Mar 13, 2015 @ 11:28 am

By Ed Friedman

As the saying goes, just when I knew all the answers, they changed all the questions. This is the situation facing the wealth management industry today. Fifteen years ago, all major firms were focused on an aging client population and developing programs to capture the tremendous wealth transfer that was about to take place. Next generation marketing programs were all the rage.

While everyone was distracted by the aging of our clients, another phenomenon was quietly developing: the aging of our adviser population. According to Cerulli's 2013 report entitled "Adviser Metrics 2013: Understanding and Addressing a More Sophisticated Population," the average age of an adviser is 50.9 and nearly one-third of all advisers are between 55 and 64 years of age.

Because of this aging population, the SEC is considering rules requiring succession planning for advisers. In an article published in InvestmentNews, it was abundantly clear that both state and federal regulators are looking to establish rules requiring advisers to create transition plans in the event they die or become incapacitated. All of this begs the question: Why do the regulators need to get involved? The answer is simple: the vast majority of advisers have no succession plan in place.

(In-depth read: Game Changers: Succession Planning)

The question of succession planning and business valuation is not much of an issue inside of the wirehouses and other firms where the adviser is a W-2 employee. In most of those firms, the firms themselves believe they are the beneficial owners of the accounts and therefore business valuation is somewhat of a moot point. That is not to say that succession planning is nonexistent. Many firms have created transition programs, replete with names like "sunset agreements." In these scenarios, the firm tends to dictate the terms by which one successor adviser compensates a retiring adviser for the transitioning of their business. The financial consideration usually combines a nominal upfront payment coupled with a staged buyout based on predetermined metrics, over a specified number of years.

Unlike an adviser in the wirehouse space, an independent adviser has many more considerations when undergoing a succession planning exercise. To begin with, they must determine which succession option makes the most sense. Some questions to consider are:

• What is the value of your practice?

• Do you mentor and groom your successor from within?

• Do you merge with another advisory firm and monetize their interest?

• Do you sell outright to an acquirer?

(More on succession: Practice Makeover: Hunting, fishing and succession planning)

These are important questions that require an awful lot of thinking and planning. In many cases, you have spent a lifetime building your business, developing a book of clients and forging personal relationships along the way. There are both financial and emotional considerations that should go into your planning. From an emotional perspective, some items to think about are:

• How many more years do you want to be involved with the business?

• Which is the best option for your clients?

• Which is the best option for your employees?

Over those years, you have built an asset — your business — that, in all likelihood, has significant value and may represent the bulk of your net worth. How you monetize that asset is of significant importance to you and your family. There are a tremendous number of variables for you to consider when analyzing which option is best for you:

• Do you sell outright for upfront cash?

• Do you sell a portion of your business (i.e 50% of cash flow) to withdraw some cash value while maintaining ongoing cash flow?

• Do you do a staged buyout over time?

• Do you create an employee stock ownership plan and allow your existing employees to buy you out?

• What are the tax and estate planning implications of your options?

A prudent adviser comes up with answers to these questions sooner rather than later. As one of the top advisers in your market, you want to determine your fate and future before the regulators force you, and others, to confront this pressing issue. A decision that is made with thoughtful and thorough analysis more often than not is your best decision. Currently, there are probably more buyers for practices than there are practices for sale.

This means that as the business owner, you're in the driver's seat and have the luxury of negotiating your best price and structure. It is estimated that approximately 25% of advisers over age 55 have a succession or monetization plan in place. Once the other 75% wake up, there will be a flood of advisers looking for liquidity. We all know the impact that will have on pricing. It's simple supply and demand.

They say old advisers never retire, they just go out of commission. Make sure you do it on your terms.

Ed Friedman is the director of strategic relationships for Dynasty Financial Partners.


Do you have a succession plan in place for your firm?

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