Succession Planning Comes to the Fore
Art by Andrea D’Aquino
According to Pierre Caramazza, head of the private wealth division at Franklin Templeton Investments, developing a succession plan is “one of the most important activities registered investment advisers [RIAs] can undertake.”
Like other RIA industry analysts and executives, Caramazza recommends that independent advisers who have not recently considered the topic of ownership transitions and succession planning do so now. To help guide advisers through the process, he just published his extensive research on the subject, the report aptly titled “Keys for Successful Succession Planning for RIAs.”
“A significant number of RIA firms are contemplating a change in ownership over the next five years, with most anticipating an eventual acquisition, merger or buyout,” Caramazza says. “It’s never been more of a seller’s market, with informed estimates putting the ratio of buyers to sellers at around 50 to one.”
Nonetheless, Caramazza notes, buyers will still play a “dominant role” in transactions when sellers come to the table unprepared. Sellers who have neglected to make real progress on preparing their firm for sale may be challenged when it comes to receiving the full valuation on an otherwise attractive business.
Echoing the findings of other analyses, Caramazza’s white paper says the seller’s market is likely to continue for some time, and potential buyers are being selective.
“They emphasize total AUM [assets under management], revenue and profitability, as well as compatibility in firm cultures,” Caramazza says. “In fact, organizational culture is a primary decision criterion when transactions are under consideration. Finding a cultural disconnect at the 11th hour has become a deal-breaker in more than one major transaction.”
Even as some deals are inevitably derailed, experts agree merger and acquisition (M&A) activity in the advisory and brokerage industry is likely to increase dramatically over the next five to seven years. For RIAs who want to take advantage of this trend, succession planning will play an important role in securing the best terms in any transaction, Caramazza says.
“Developing a succession plan is a time-consuming and ongoing process,” he advises. “RIAs who want to guarantee the future of their firm, the best interests of their clients and the well-being of their employees should make succession planning a priority.”
Less than one in three financial advisers has a formal succession plan in place today, according to another recent report, “The Succession Challenge,” issued by the Financial Planning Association (FPA) and Janus Henderson Investors. Overall, 41% have some sort of succession plan. For those within five years of retirement, 40% have a formal plan, but for those within five through nine years of retirement, the figure drops to 34%.
Advisers in larger practices are more apt to have a formal plan, with 60% of those in firms with $500 million or more in assets under administration (AUA) having one. Among firms with less than $50 million in AUA, a mere 13% have one.
Among advisers with formal plans, succession strategies tend to focus far more on setting goals for maximizing the value of the business than setting out in detail how a transition of the business will actually take place. In fact, 72% of respondents said their plan includes a goal for the value of the business, while 61% have a plan that includes discussion of the client transition process, 57% have a plan that includes the workload transition process, and 56% have a plan that includes the time frame for the transfer process.