By the time many Registered Investment Advisor (RIA) firms get serious about succession, they find themselves facing a number of common challenges, which in many cases can prove to be insurmountable. Even firms that succeed at succession often experience challenges that can lead to eventual failure. Here’s a look at some of the most common mistakes firms make, and some strategies that can lead to greater success.
Why Succession Planning Fails
The succession-related pitfalls among RIAs are remarkably common. A senior generation assumes succession will naturally occur because younger advisors are in place. But when it’s time to transition, they discover that:
- The numbers don’t work. Rising firm valuations often outpace the financial capabilities of the second generation (G2). In addition, G2s may be at a stage in their lives where they have their greatest financial obligations, including mortgages, various tuitions, multiple car payments, and more. It simply might not be the right time for them to put money toward a buyout.
- The will is missing. Ownership comes with risk and responsibilities that extend far beyond financial considerations. Not every great advisor is automatically an attractive G2 candidate. They may not be interested in the challenges of running a business, which require different skill sets than being a client focused advisor. The next generation of advisors simply might not want to take over.
- The talent bench is too thin. A few strong advisors aren’t enough; firms need a pool of candidates who can collectively replace the skill sets of multiple senior partners. In addition, it’s not just about having a G2, it’s also about having a third generation (G3) and fourth generation (G4) that can move up and take on some of the responsibilities the new owners will give up as they take on different roles.
What a Successful Plan Requires
A thoughtful succession plan weaves together people, processes, and intelligent financial design. Recognizing the challenges listed above, successful firms address them directly, often by instituting these strategies:
- Start early. Equity transfer works best over a 10- to 15-year horizon, allowing G2s to gradually buy in. Waiting until owners are in their 60s may limit options and may force a path that wasn’t in the owner’s envisioned strategy. This also creates “buy-in” to the growth of the organization because they have a vested interest in the success.
- Build a deep bench. Succession often isn’t a one-to-one replacement. As valuations climb, it may take four new owners to replace two departing ones. Successful firms focus on consistently developing advisor talent down to G3 and below.
- Identify and develop leaders. Not all good advisors are good owners. A rigorous skills assessment – and ongoing leadership training – ensures future partners have both the client-facing ability and the strategic, operational and financial acumen to run the business.
- Design a financing path. Younger buyers rarely have the capital for large equity chunks. Instead, look at structured buy-ins, seller financing, and reinvestment policies which can create more viable options.
- Document the plan. A “mental plan” isn’t enough. A written, detailed document keeps stakeholders accountable, avoids confusion, and helps retain key talent who otherwise might leave due to uncertainty.
The Hidden Benefit of Succession Planning
Paradoxically, firms that pursue the proper succession planning strategies also strengthen themselves in the eyes of potential purchasers. At the same time, the absence of a formal plan can erode value in multiple ways. For instance, if an owner dies unexpectedly, ownership may fall to a spouse or estate, leaving G2s sidelined and clients uncertain. This creates a scenario in which a “fire sale” (at lower valuations) becomes more likely. In addition, a lack of clarity over succession can push rising stars to seek opportunities elsewhere, creating a circumstance in which potential acquirers may view the firm as risky if leadership continuity is unclear.
Succession as a Strategy
The most successful firms don’t view succession as a finish line. They see it as a core, ongoing strategic initiative – one that protects value, cultivates talent, and ensures continuity for clients and employees alike. Succession isn’t just about transferring equity. It’s about transferring vision, culture, and leadership. Done well, it preserves legacy while setting the stage for future growth.
Founded in 1981, MarshBerry is a global leader in financial advisory and consulting services serving the insurance brokerage and wealth management industries to help clients grow and advance their business strategies. With locations across North America and Europe, MarshBerry market sector expertise includes property and casualty agents & brokers, employee benefit firms and specialty distributors, partners in insurtech, capital markets, and insurance carriers, as well as registered investment advisors, retirement planning and life insurance firms. Clients choose MarshBerry as their trusted advisor for every stage of ownership to help them build, enhance and sustain value through Financial Advisory solutions (Investment Banking; Merger & Acquisition Advisory, Debt & Capital Raising, Business Consulting), Growth Advisory solutions (Organic Growth, Aggregation, Leadership, Sales & Talent Solutions) and Market Intelligence and Performance Benchmarking.
