Defusing the industry's ticking time bomb

Mention “succession” to most people in the last few years, and they would probably think about the hit HBO black comedy about the vicious intra-family battle for control of a fictional media empire.

But in the advisor industry, succession is a ticking time bomb, a looming crisis born out of aging leadership and economics that no longer make sense. The numbers are stark – the average age of a family office principal is 68, according to data from Deloitte Private. But only 22 percent of respondents in DeVoe & Company’s latest annual RIA M&A outlook said that the next generation can afford to buy them out.

Companies are increasingly aware of this issue – 67 percent of the RIA leaders surveyed in the DeVoe & Company report cited succession planning as a major issue, up from 62 percent a year earlier.

“M&A may be booming, but succession planning is falling behind,” said David DeVoe, CEO of DeVoe & Company, in the report. “The independent RIA segment is now in a succession crisis. The traditional path of internal succession is slipping out of reach for the majority of SEC registered firms.”

Passing the business on to a family member may be an option for some firms, but what if your family can’t, or won’t, take over? A sale, say, to private equity, followed by years on the golf course, will be the perfect exit strategy for some business owners. But this can bring its own problems – not every potential acquirer will be a fit for your employees or your clients.

The cultural aspect of succession is critical. Chuck Failla, CEO of Sovereign Financial Group and host of goRIA, recently summed this up perfectly when he told me that Sovereign is his third child.

Sovereign, which has surpassed $1 billion in assets under management, has had plenty of overtures from private equity to sell. But this isn’t an option for Failla.  

Instead of selling to outside capital, he has opted to sell a portion of his equity to the company’s leaders through seller financing. “I am not selling out – I am sharing the equity so that I can put some in the hands of the next generation,” he told InvestmentNews. “It is important for me to maintain the culture of Sovereign.”

We could see more of this model in the coming years – Ritholtz Wealth Management, for example, is also sharing the wealth. The RIA recently announced a succession plan that involves expanding the company’s equity structure to 29 employees.

For Failla, his decision to sell some of his equity is the best of both worlds. He is ensuring his legacy at Sovereign while continuing to do what he loves – working with his book of business while serving as the face of the company and helping to guide its strategy. But he told me that he won’t have to focus on the minutiae that comes with running the company.

While this approach won’t work for every advisory firm leader, it proves that there is at least one way to defuse the succession time bomb.