Navigating RIA M&A With a Focus on Succession Planning

A significant trend is emerging within RIAs—baby boomers, who own a majority of RIA firms, are approaching retirement age. Unfortunately, this is the plumber with the leaky tap—many do not have a business succession and exit plan. This is a critical challenge as most businesses in this market are “key person” dependent (as in, the owner is the rainmaker and the principal advisor).

Despite loyal clients and stable income streams, reliance on the owner as the primary advisor and rainmaker poses inherent risks. There is an urgent need to address this issue to secure the future of these businesses and the answer, as evident from recent developments, lies in mergers and acquisitions within the RIA space. In fact, it’s been speculated that this is a year of mega consolidation in RIAs.

Related: RIA Edge Podcast: DFA’s Catherine Williams on 2023 RIA M&A Gamechangers

In fact, mergers and acquisitions in the RIA space have become increasingly common in recent years. Looking at Fidelity’s second quarter wealth management M&A report, which revealed that 115 RIA transactions occurred in the first half of the year, down just 2.5% year-over-year. So, while 2023 might not be setting records for RIA purchases, the sector has displayed consistent growth even in the face of a challenging economic environment and we can expect to see continued consolidation and M&A activity in the coming years.

However, simply merging companies isn’t enough to resolve the underlying problem: that many advisors are approaching an imminent exit. While the day-to-day operations of RIAs are focused on the financial well-being of its clients, taking a strategic approach to your own exit planning cannot be ignored.

Related: Convergence Dominates the Financial Advisor M&A Market

Actual and psychological exit from a business is a big deal for an owner who built it from scratch and has been the key person for the last 40 years. Many aging advisors simply have not taken the advice bestowed to clients and have yet to prepare the business, their finances or themselves for a successful exit. Drawing on my decades of experience in succession and exit planning, many leave it too late (hoping to avoid it altogether). We have had several clients well into their 70s and a couple even in their 80s and not in a rush to go anywhere. Often this will disenfranchise younger advisors in the business—some leaving to set up on their own after years of waiting to take the reins. 

Without addressing the issue of succession planning, other problems can arise. Consolidating multiple owner-dependent businesses creates a larger entity that is now reliant on multiple owners. To navigate this situation effectively, financial advisors and business leaders must adopt a comprehensive approach to secure the future of their practice. Here are key steps to consider:

1. Corporatize the Business: Instead of multiple owners, the business should be structured with functional managers and an independent board with corporate governance principles. This move helps reduce dependence on individual owners and creates a more sustainable structure.
2. Management Succession Plan: Identify key staff members who have the potential to manage the day-to-day operations without direct owner involvement. A well-designed management succession plan will groom these individuals for leadership roles within the organization, ensuring a seamless transition within a few years.
3. Equity Ownership Plan: To incentivize key staff and ensure alignment with the owners’ objectives, implement an equity ownership plan. This plan should reward key employees for their increased responsibilities while providing existing owners with the opportunity to reduce equity and take cash off the table.
4. Strategic Financial Model: Design a strategic financial model that focuses on growing the value, revenue and profitability of the RIA while simultaneously reducing risks is a necessity. This model should align with the chosen corporate structure and address the unique characteristics of the business.
5. Boutique or Scale Model: Choose between a boutique or scale model depending on the specific objectives of the RIA. It’s essential to ensure that all aspects of the business align with the chosen model for consistency and efficiency.
6. Strategic Business Succession and Exit Plan: Develop and implement a robust business succession and exit plan that highlights the potential value of the RIA and encourages all leaders within the organization to work toward achieving it.

To identify the firm’s valuation and prioritize activities that accelerate value, financial advisors can turn to technology solutions that offer business insights reports that can enable RIAs to enhance their decision-making process and align their efforts with their long-term objectives.

As the baby boomer generation of RIAs approaches retirement, the need for a well-defined business succession and exit plan becomes paramount. While mergers and acquisitions can be effective tools to address challenges, they should be approached strategically. Corporatizing the business, implementing a management succession plan and aligning key staff with equity ownership are crucial steps to ensure a secure future for RIAs. Data-driven insights can provide financial advisors with the necessary guidance to bridge the value gap and achieve long-term success in the RIA space. By combining the right strategies and embracing change, RIAs can adapt to the evolving market landscape and create a legacy that withstands the test of time.

Craig West is Founder and Chairman of Capitaliz

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