When it comes to succession planning for advisors in the wealth management industry, the process is similar to assisting a family leader with passing the reins to the next generation. For business owners planning for their eventual exit, successors replace owners exiting their Registered Investment Advisor (RIA) firm. These successors might be internal, external or, in some cases, both.

One may assume that opting to choose internal successors would lead to an easier transition, as these individuals already understand the firm’s processes, service approach, investment philosophy and client experience. But the reality is that this kind of succession isn’t as straightforward as it sounds.

Firm founders have spent years building a successful business. Founders tend to place their firm on a pedestal and put a lot of faith in the loyalty of clients. There’s a tendency to underplan for the transition of ownership, because things are operating how the founder desires.

Choosing Successors From Within

Internal succession might seem like an excellent way to ease the burden and pressure of succession, but it comes with both pros and cons.

If a candidate from within the firm is selected, this individual would presumably have a solid grasp on the nuances of all aspects of the business and the internal culture. Plus, for some owners, there’s the personal benefit of retaining most of the cash flows, but with this additional cash flow often the owner must keep working longer than they originally anticipated. Also, there’s the likelihood that the firm keeps thriving in something resembling the owner’s own image because the owner is able to hand select the successor(s), rather than have outside capital influence future hires.

When compared to a merger, acquisition, outright sale to an external buyer or closing upon retirement, 69% of advisors indicate that an internal succession solution is preferred.1 These statistics clearly indicate a strong desire to maintain control, independence and the founder’s legacy.

The Often-Overlooked Complexities of Internal Succession

What factors cause an internal succession to fail? Here are some of the most common problems RIA firms face:

1. Treating Internal Succession the Same as an External Sale of the Business

In far too many instances, firms treat internal succession the same as an external sale of the business.

However, outright sales completely diverge from internal succession, requiring a more straightforward approach with business brokering — whereas internal succession necessitates a well-rounded team to overlook the transition. You need an experienced group who can assess the problems involved and provide an array of solutions from different perspectives.

The reality is that only a third of those desiring internal successors plan correctly and don’t end up failing, while another third end up losing their runway and prematurely accelerate plans and their own departure with internal successors.2 The last third must sell to a third party or merge to save the remnants of their organization.

2. Not Giving Up Control

Another common problem is that founders don’t want to relinquish control because their personal identity is wrapped up in the business. They want their successor to fulfill their vision. But inevitably, an internal successor doesn’t want to just execute the original founder’s vision. Internal successors may want to position the business to achieve new growth goals, pursue new strategic initiatives or serve new client demographics heading into the future.3

They will make different decisions than the founders would make, and this often leads to founders pulling back decision-making authority. Founders want to be able to veto what they perceive to be poor decisions, but successors can become frustrated if they were promised a big say, but really only have a say if they agree with the founders. Competing visions can give rise to internal conflict, complicating the planning and communication that are necessary to a successful transition.

3. Overestimating the Strength of Client Relationships

Aside from the potential conflict that could arise within the firm, a founder’s mindset regarding clients could lead to potential roadblocks as well. Many founders may feel wary about leaving client relationships in the hands of internal successors. Founders often have trouble literally stepping out of the meetings with clients with whom they have built decade-long relationships, in order to give their successors the space to develop their own personal relationships with clients.

On the other hand, there are clients who have stuck with the firm solely because of the personal connections to the founder, and so the founder may overvalue the firm and underprepare for an eventual exit from the firm assuming there will be no client loss.4 We have seen some client loss through these transitions, usually in cases where contact with the successors was never established. For example, one client left to work with a son-in-law, rather than the successor. There is always a reason, but a small loss should be factored into these internal transitions just like there would be in a transition of entities.

4. Logistics

Grooming an internal successor might seem like the best idea, but that “right person” — whom the founder has spent years mentoring — might leave the firm. Do not underestimate this possibility. We have seen this happen to more firms than we have seen successfully transition. When it happens, the founders have no backup plan when they are ready to retire. Many times, founders underestimate how long succession planning will take, and more importantly the successors expect a faster transition.

Fifty-four percent of firms with an adequate succession plan in place indicate that advisors need at least four years to implement a plan.5 However, realistic assumptions should be laid out explicitly with the next generation. We often see numbers like three years to five years thrown out initially, but very often, the founder’s full retirement gets pushed back, and when that happens, highly talented successors will move on.

5. An Inadequate Plan

A 2017 TD Ameritrade Institutional study found that for small or “operator” firms (those firms generating $150,000 to $500,000 in annual revenue), less than one in five (19%) had an adequate plan, with owners of small firms much likelier to be unsure of what their ideal solution might be. For smaller firms, either succession is not a priority, there are no clear successor candidates as they may have not yet begun to form a team, or there is difficulty in finding a partner to execute an M&A solution.

For the largest firms profiled in the study, the biggest concern was having a team in place that could work independently of current owners. Indicating their planning is likely further along, larger firms also tend to be more concerned with deal terms and deal financing.6

Between managing a full plate of client work and juggling the day-to-day tasks that come with running a business, many founders and firm leaders end up putting succession planning on the backburner for more near-term priorities — while others face psychological roadblocks such as the unwillingness to let go or a fear of passing the reins to a new team. All of this can converge to make adequate planning a difficult feat.

6. The Risk of Cash Flow and Profit Shortage

Many times, owners don’t take into account the risks of decreasing cash flow or profits from the business during the buyout period process. Buyers are looking for a venture that is profitable or could be profitable in the future, which means the buyout period will require significant financing. Many firms do not conduct an in-depth financial analysis or create a strategy that can shore up cash flow if they need to take cost-cutting or other measures, posing a significant financial risk to the viability of the business.

Outside of these challenges, there often isn’t the time, talent, business acumen, growth rates or cash flow to make an internal succession plan work.

How Some Firms Combat the Pitfalls of Internal Succession Planning

So, for those firms who are successful in internal succession planning, what are they doing? They’re still utilizing outside help.

The TD Ameritrade Institutional study gave the example of a sole owner with $500 million in assets under management set to transition her business to current employees in the next three years. She’s able to do this with a combination of outside loans, owner financing and external consultants ready to provide guidance.7

During these situations, those external consultants mentioned above are integral to the process. They provide an objective eye and help assess the transition from all angles. As a dedicated unit, they’re figuring out timing and prices, while ensuring that the intended successors achieve adequate training and preparation. This is how firms assure the process is seamless.

By using an external consultant to structure a succession, firm owners can identify and select the succession model that’s right for them. For instance, at the Wealth Advisor Alliance, we offer firm leaders a range of options for structuring their succession, including:

  • Executing a point-in-time transition
  • Winding down in phases before fully retiring
  • Partially transitioning clients and selling a portion of the business, rather than all at once
  • Creating a timeline for the transition by using a tranching strategy, which gives the founder and future owners the time to manage succession on their own terms and plan for the milestones on the horizon

Every Transition Plan Requires Knowledgeable and Experienced Advisors

You can have the best of intentions with internal succession and aim to plan with precision and practicality.

However, if you’re working with consultants and advisors ill-equipped to sufficiently catalyze the process, your proactiveness won’t be rewarded.

The team at the Wealth Advisor Alliance has experience facilitating seamless succession planning. With these resources, we use our diverse knowledge and industry insights to break down any transition into manageable steps. Through our parent company, Forum Financial Management, we also have a community of talented, like-minded advisors that advisors can tap into for support.

To learn more about how we can help you amplify your life’s work, contact us at team@waalliance.com.

We help advisors establish and grow successful wealth management practices. You can follow us on Twitter@theWAAlliance and on LinkedIn.

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1Succession Planning: Beyond Ownership Transition, It’s a Smart Human Capital Strategy.” TD Ameritrade Institutional Banking, December 2017. Accessed January 2020.

2Keys to Successful Succession Planning for RIAs.” Institutional Investor’s Thought Leadership Studio and Franklin Templeton Investments, January 2019. Accessed January 2020.

3 Michael Kitces, “Best Practices for Internal Succession Planning of Financial Advisory Firms,” Kitces.com. September 2015. Accessed January 2020.

4 “Keys to Successful Succession Planning for RIAs.” Institutional Investor’s Thought Leadership Studio and Franklin Templeton Investments, January 2019. Accessed January 2020.

5 “Succession Planning: Beyond Ownership Transition, It’s a Smart Human Capital Strategy.” TD Ameritrade Institutional, December 2017. Accessed January 2020.

6 Ibid.

7 Ibid.


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