Registered investment advisory firm owners who have identified a potential successor can never pass the reins to next-generation financial advisors who leave the firm.
And five experts in succession planning for RIAs and other advisory practices say that is a common problem adding to the many challenges around how the industry will replace more than 100,000 advisors expected to retire in the next decade and meet rising consumer demand for quality advice.
The possible solutions require thoughtful communication, career paths and equity compensation strategies, as well as an understanding of the many available sources of capital and types of transactions, according to Mitchell "Mitch" Fenimore, the Lancaster, Pennsylvania, market leader for Camp Hill, Pennsylvania-based RIA firm River Wealth Advisors.
As a former investment banker who also frequently advises business owners in many fields about their succession plans, Fenimore said possible next-generation proprietors often leave the firm after balking at the "added headache" of leading it, the high potential price tag of the equity or even failing to hear from the founder that they could receive it someday. Many would "rather jump over to a new firm," instead of sticking around — even though they could stand to make a lot of money eventually as the successor, he said in an interview.
"Why do I want to take on this burden, this hassle, when I'm perfectly comfortable with my lifestyle and making the money that I'm making?" Fenimore said. "The sooner you can get ahead of this in succession planning, the better off you can be. This is where the real money is, if you become an owner."
The latest stark numbers and the potential solution
As much as industry leaders have talked about such deficiencies with succession plans across wealth management, a lot of the available research suggests they have yet to address them.
Out of a group of hundreds of advisors polled this summer by Edward Jones and Morning Consult, just 42% said they have completed a succession plan with full documentation and legal requirements, the firms said earlier this month. Even though 86% of junior advisors expressed interest in receiving an established practice from retiring founders, only 38% of senior advisors anticipating a transition within five years have identified a successor.
But they cited the complexity of succession planning and the emotional hurdles of handing off their legacy businesses as the most common barriers. For their parts, the junior advisors said more training resources, plain guidance and support from the firm and an established structure for any matching or transition program would help them inherit those businesses.
But advisors and other industry professionals have grown accustomed to such statistics in recent years. And, to paraphrase a common axiom in the field, the firms that have figured out their particular issues with succession planning have simply cracked the code at one specific firm in an industry with tens of thousands of them.
To avoid the pitfall of a successor leaving founders at the proverbial altar, Fenimore and other experts recommend that RIA and other advisory practice owners:
- Discuss succession planning expressly with the next-generation advisor, even if there is not yet a specific timeline for the transition.
- Forget the idea of waiting to do a succession plan a few years before retirement, given that internal handoffs are usually a decade or more in the making.
- Ensure that they have created equity compensation plans and career paths for advisors that aid their long-term retention on the team and make the business more valuable.
- When the time is right, construct a capital financing structure that will not leave early-career advisors on the hook for a huge lump sum or debt that could take decades to pay back.
The communication component looms large above all the other factors, according to Julie Genjac, an advisor coach who is the vice president of applied insights for asset management firm Hartford Funds. Most of the time, Genjac sees successors leave their firm simply "because they don't understand" that there is an opportunity to become an owner, in an example in which "ambiguity is interpreted negatively" and they see a clearer path forward for their career elsewhere, she said.
While that topic is "a very emotional conversation for a seasoned advisor," they should know that the successors "don't need every answer, they just need some sort of evidence that there's a plan and a willingness to discuss it," she said. And that can fall by the wayside in many albeit important other conversations around, say, valuation or capital.
"This should be a glidepath where you're slowly engaging in these things," Genjac said. "They spend little to no time discussing the future of the people involved, and I always say you can create the most beautiful buy-sell agreement, but if your successor goes out the door, then none of those details matter."
You did it your way, let someone else do it theirs
While founders usually understand that they need those next-generation advisors, they're also "rightly concerned about giving or selling equity to G-2 before they're ready, before they know whether or not they're the real successor," said Steven Tenney, the founder of consulting and coaching firm Grandview & Company and author of a book called "
That longer runway can open space for engaging with investment bankers or other professionals to iron out details such as shareholder voting rights or operating agreements that transfer equity without changing daily operational decisions right away. The founders must "allow G-2 to thrive and use modern approaches," and the successors need "to look at G-1 and recognize that they've got incredible knowledge and they need to do everything they can to absorb that knowledge."
Gaining that mutual understanding entails frequent discussions that put every possible issue out in the open in a constantly evolving succession plan. So founders may have to develop some acceptance that they will be yielding control to someone else.
"They've been doing it for three decades or more. They've been successful, and they fear that the next generation won't do it the same way or won't do it as well. When they set their egos aside and they realize that there may be a better way to do something and they allow G-2 to explore that, they can reap tremendous rewards," Tenney said. "I see it all the time, where G-1 just holds on very, very tightly to various responsibilities at the firm, and there's very little wiggle room in terms of how things can get executed. It needs to be done their way."
Unfortunately, the industry remains "a sink or swim" scenario for many early-career advisors, according to Hannah Moore, founder of the training firm that runs the Externship program for aspiring planning professionals, Amplified Planning, and Richardson, Texas-based RIA firm Guiding Wealth. While "career pathing is wonderful," many firms now need a "training pathway that meets the career path," Moore said. Greater understanding of the former hasn't led to the latter, though.
"What worked for us 10 years ago in how we're approaching talent will not work today," Moore said. "What we're seeing is, we can have new planners coming in, but the managers need to be trained in how to manage their teams."
Moving from intention to a concrete plan
At the same time, the rhetoric around succession across the industry can be "a little quick to paint the G-1 as the villain," said Scott Leak, the director of business development with industry consulting and M&A advisory firm FP Transitions. For instance, Leak said he "wouldn't consider anyone who's been with the organization less than five years for ownership," and he has seen those potential successors leave firms when informal discussions have at least taken place.
However, they get "fed up with the carrot being dangled" at them, to the point that they tell their employers that they "don't want to have to leave, but I will if I need to," Leak said. In his firm's library of online succession guides and
"It is absolutely a problem. We see it all the time," Leak said. "That's the piece that a lot of firms never quite get to. There's this vague expectation that, at some point, someday, it's going to happen and they just delay and delay it."
Financing strategies such as transferring 10% of the firm's equity to the successor before pursuing a deal with an outside investor or negotiating a swap with a bigger firm as part of an outside acquisition could boost the feasibility for them, Leak pointed out. And appointing multiple successors rather than just one might aid the transition process further, Fenimore said.
Such solutions can head off successor concerns like, "'Why am I funding this guy's retirement?'" and founder worries about "the idea of one person having to take on the full responsibility of leadership," he said. But neither side will get there without getting together to share their perspectives on a challenge facing the firm and the entire industry.
"I think sometimes there's a gap between what the owner is looking for and what the buyer, the successor is looking for," Fenimore said. "There's a disconnect between the way that the buyer would run this thing and the way that the seller has run it."
