RIAs Are Coming Up Short on Succession Planning: Fidelity | Lord Abbett
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Practice Management

Unless advisory firms plan for an orderly ownership transfer, they'll have to sell to a buyer or exit the business altogether.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

When it comes to internal succession plans, RIA owners are coming up short.

Almost two-thirds of advisory firms say they prefer an internal succession, but only 27% have next-generation owners in place and only 9% of that group have equity stakes in their firms, according to Fidelity's 2015 RIA Benchmarking Study.

"That's really stark," says David Canter, executive vice president, practice management and consulting for Fidelity Clearing & Custody Solutions. "Nine percent is nothing. Firms say they want to have an internal succession, but unless they plan to provide for an orderly ownership transfer, and consider granting equity ownership, they're going to have to sell to an acquirer or exit the business."

Underscoring the problem is the study's finding that more than one in three firm owners (37%) are planning to exit the business within the next 10 years, up from 30% in 2014. And their bench strength isn't inspiring confidence: only 50% of firms strongly agree that their staff members have the skills and training for the firm to achieve its strategic objectives.

Time and Planning Critical
Owners planning for an internal succession need to give themselves five to 10 years before exiting to find and groom talent, according to the study.

"As firm leaders sit down to think about their business plan for 2016, they should also consider what their five-year, 10-year, even 20-year plan is for their business," Canter says. "They have to really understand what they need from next-generation leaders—what skills and qualifications do they expect from them?"

Planning a transition in advance also helps facilitate financing, Canter points out. "If you wait until the last minute, how is the younger advisor going to afford it?" he says.

Demographics as Destiny
The study also found that 23% of RIA clients were at least 70 years old, and this group holds 28% of firms' assets.

"This client demographic shift is really, really important," Canter says. "Advisors have to make sure they don't have a relationship gap. Do they have younger clients in the pipeline? Do they have solid relationships and connective tissue with other members of a clients' family?"

"Demographics creep up on you," he continued. "The 30-year-old of today is 40 in 10 years."

As in previous years, the Fidelity study identified a group of high-performing firms (HPFs)—those firms which outperformed others in the areas of growth, productivity, and profitability—and identified some of their best practices.

Best Practices of Top Firms
These high-performing firms are more prepared when it comes to succession planning, the study found. Here's what they did differently:

  • More than half of HPFs (52%) have succession plans ready for implementation, compared with 40% of all other firms.
  • A higher percentage of HPFs have changed their approach or readiness for succession over the last three years (68% versus 52%).
  • More HPFs have hired, identified, or begun developing potential successors in the past three years (23% versus 15%).
  • HPFs also appear to be connecting the dots between succession planning and valuation: 75% of them have a mechanism in place to determine firm value in the event of an internal succession or ownership transition (versus 61% of all other firms). 

—By Charles Paikert



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