Waiting too long can make your worst fears a reality

Over the last half decade, or so, consolidation has become synonymous with the world of registered investment advisors.

It's well known that as a group, principals at RIA firms are chronologically mature. Understandably, the need to implement succession plans, lessen financial risks and be a part of something larger, or even just a good, old-fashioned desire to embrace a full-stop retirement, have motivated an increasing number of principals to sell what for most is their life’s work.

But certainly not everyone is ready for change. As an acquirer-integrator of more than 25 advisory firms in the last five years, I am familiar with the above motivations. And until now, we have naturally tended to focus more on the reasons for selling, and less so on the obstacles.

With the goal of gaining a deeper understanding of the emotional roadblocks to selling, we recently collaborated with San Francisco-based DeVoe & Co. on a white paper, “The Heart of the Deal: Understanding and overcoming the emotional barriers of selling your RIA.”

We found that the primary reason that principals continue to run their own shops, rather than, say, cashing out or offloading the day-to-day responsibilities, has to do with fear. Though it’s a relevant consideration, this fear is not merely born of concern about no longer being in charge.

When it comes to prohibitive fear, at the summit is a concern about implementing an equitable succession plan or sale. For example, 66% of advisors don’t have an in-house candidate in place who’s ready (or willing) to take over the reins. Compounding matters, even for those firms that do have someone waiting in the wings, is the reality that today’s RIA sales multiples make it virtually impossible financially to complete an internal succession transaction.

And that leads to the fear of embarking on an outside sale.

The fact is that most advisors rightfully believe that they are in the business of helping people achieve financial independence and live better lives. The idea of selling and leaving their clients and employees to the whims of the “wrong buyer” not only keeps them awake at night, but it can push them to work years longer than they might otherwise want to.

While there’s some crossover, our research found that the top five concerns about succession were rooted in emotion. They include the fear of selling to the wrong buyer, loss of control, leaving their loyal clients and friends to receive a lesser standard of care and giving up leadership to someone less qualified, as well as concern for the professional futures of their staff.

The emotion around selling is something that only a principal who has experienced it can fully understand. But succession planning is part of a successful practice, and it should be embraced and even celebrated. As all advisers explain to their retail clients, they must prepare for the future. The concern is when we advisers, who coach people about looking ahead, allow our own anxieties to delay the implementation of a plan. Waiting too long is, unfortunately, the surest way to make fears about the future a reality.

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.