A New Twist on Succession Planning Urgency
May 5, 2017, by Matt Sonnen
Although the drumbeat for succession planning has been getting louder over the years, the industry continues to remain woefully unprepared.
We have all seen the headlines screaming about the more than two-thirds of advisers who don’t have succession plans, yet the average age of those adviser principals who are owners is getting closer to 60.
Clearly there is a wide gap here, yet for many advisers, they aren’t feeling the urgency to take steps to prepare or groom the next generation of advisers to take over. These adviser-owners tell us that they aren’t concerned, haven’t found the right successor or simply want to continue to keep the status quo.
What many of these adviser owners aren’t thinking about is a new industry trend that we have identified, which we call “Breakaway Advisor Movement: Version 3.0,” and it has massive implications for ramping up the urgency for succession planning.
The first breakaway movement began more than 20 years ago and continues as captive wirehouse advisers leave their employers for a better way to run their businesses as registered investment advisers. To help facilitate these breakaways, a cottage industry of aggregators and roll-ups came on the scene to provide start-up capital and transition assistance for an equity stake or continuing basis points in the newly established firms.
As these RIA firms matured, they quickly realized that they had the experience and scale to replicate these platforms on their own at a much lower cost, and many have since broken away from these service providers. This realization by advisers led to “Breakaway Advisor Movement, Version 2.0.”
In a similar fashion, existing RIAs are starting to see another wave of breakaways among the younger, more entrepreneurial employees at their firms. These up and comers who are wondering what future they will have at their firms are also beginning to say to themselves, “There has to be a better way” and are looking to start their own RIAs in direct competition to the firms that they are leaving.
Most of this is driven by the firm’s lack of succession planning and the younger employees feeling like they will never get a meaningful piece of the ownership pie. As a result, these energetic, entrepreneurial advisers who have learned the RIA craft see that due to the owner’s lack of planning, their only option is to break away themselves, taking their business development, relationships and technology-savvy skills with them.
When this happens, the aging adviser’s firm’s valuation takes a big hit.
After all, what is left to acquire in a firm that is losing its best talent and client relationships? Who would want to pay a premium price for that kind of business?
Thus, the writing is on the wall. Advisers who haven’t cemented a future generation of leaders are at extreme risk of not being able to monetize their decades of hard work.
Succession planning isn’t easy. However, not planning is the biggest risk that advisers can take as they consider their retirement futures.
The good news is that there is still time, but it is rapidly running out as “Breakaway Movement, Version 3.0” gains momentum. Advisers owe it to themselves, their firms and their clients to start planning how to build a career track for their next generation of advisers to play a meaningful role in the future of their businesses.
For firms that have prepared, this process is a healthy one that brings needed vitality into the business while at the same time, richly rewarding the founders.
This story is part of a 30-30 series on smarter succession planning
To view article, click here