RIA Succession: Are You Feeling Unprepared?

By The Lerner Group on September 30, 2020

A New Approach to Help Ensure Your Practice Will Be Ready 

It seems like everywhere we turn these days you can read new studies on how the advisory industry struggles with a sense of “unpreparedness” when it comes to succession planning.

While this malaise seems to vary by size or complexity of firm, the degree of comfort RIA owners/founders feel about handing over the keys to run their practice is not where it needs to be. And, it doesn’t appear to be getting much better either.

In a recent study, DeVoe and Company shared that more than half (57%) of the surveyed RIAs said that a leadership transition from founders to G2 would be bumpy—or worse. More concerning, 13% said that it would present a significant or severe challenge. A small percentage of firms simply state that no qualified next-gen candidate exists within the firm. – source: DeVoe and Company July 2020: It’s Time for A Human Capital Revolution

Yet, while it has become clear this gap exists in the minds of many RIA owners, it is less clear that those experiencing it know what the root causes are and what to do about it.

This sense of uneasiness in RIA owners may have multiple root causes. Questions may arise as to whether your own Next Gen Advisors are “battle tested” or are even as committed as you were at this stage in their career. Perhaps you feel they lack the necessary skills or experience to propel your business to the next level.

Let’s take a quick look at some of the more common root causes we hear about that may be contributing to this sense of unpreparedness:

1. Lack of Bench Strength:

• Lack of Rain-making Skills: This is one of the most commonly mentioned gaps in G2 advisors. As the industry evolved from a “sales driven” model to a “process driven” model many practices sought and retained different core skills that were more consistent with their business model of choice. Expanding fiduciary responsibilities many times came at the expense of traditional sales activities. Historically, growth may have come from client referrals organically more so than from “beating the bushes” for new prospects to convert into clients.

It is still not uncommon for most new clients to come primarily from the G1 advisors rather than the G2 advisors in the practice. Unfortunately, G2 new asset contributions today still seem to fall short of providing this critical lifeblood of a thriving practice.

• Lack of a Depth of Understanding: Depth of understanding as it relates to the intricacies of market dynamics may be another root cause. Being able to clearly and concisely “connect the dots” for clients in an extremely volatile market environment may be another source of apprehensiveness for senior advisors. The value of grey matter often lends credibility to putting current events into historical context.
•  Talking Clients Off the Ledge: Experience in helping clients bridge troubled waters is not a skill that is easily obtained by reading a textbook or taking a Series 65 exam. Years of hand-holding experience come to the fore in moments of truth when a client’s trust in you may be the only thing standing between them and taking needless long-term losses in the value of their portfolios.

2. Lack of a magnetic Post-Retirement Role: Perhaps this feeling of unpreparedness also stems from the lack of a well-defined “after-life” when transitioning to retirement. The bumpy journey of transitioning from a successful career to achieving a sense of significance in retirement is something that keeps gnawing at many advisors.

3. Loss of Control: Another root cause of a sense of unpreparedness may stem from a fear of a loss of control. Thoughts of “will my clients be taken care of as well I have taken care of them? Or, will my successors maintain our values and reputation for integrity and trustworthiness.”

Doubts of an uncertain future can keep even the most diligent practitioner from knowing when it is time to leave.

Identifying that the issue exists is a good start but unfortunately only half the battle. Unless you go to work on the underlying conditions that are causing a lack of preparedness then the problem may perpetuate itself or even worsen. Time does not always cure all. And, one day, ready or not, the need to transition out of our current roles is something that we all must face.

What to Do About It: Create a pre-event plan by entering into a “strategic partnership” well in advance of when you are ready to transition

Pre-liquidity event planning is a niche that many advisors have specialized in for their own private clients who are self-made entrepreneurs and may need assistance in monetizing their good fortune. To do this well takes months, perhaps even years of thoughtful preparation, planning, checklists and handholding by experienced professionals who serve this business niche.

So, as a founder / owner of a successful RIA business why should your needs be much different? For many RIA owners this may be the single biggest conversion of private equity or a lifetime monetizing event. Most of today’s transition deal structures include a blend of upfront consideration and on-going performance criteria to ensure the valuation of the enterprise is realized. Having a successful RIA transition partner at your side can ensure your team and client experience will never miss a beat as you systematically integrate your practices.

Thus, the stakes are extreme high in selecting the right successor. Due to the long-term consequences and the potential enterprise value at risk it is prudent to consider progressively dating with a proven, well vetted successor well BEFORE you get formally married.

Key Questions to Ask Yourself: What if you could create the ideal successor from scratch? What values and attributes would they have? What competencies would they need to demonstrate on day one? What if you were able to co-create your requirements together with your ideal successor? What if your clients could experience your successors competencies well in advance of your transition?

Strategic combinations, such as creating a win-win partnership with another like-minded RIA firm may just be the path out of the unpreparedness spiral. By selecting and nurturing a partner RIA firm on your expectation and standards you can ensure that a fully enabled solution stands ready for your practice should you need them to step in when the time comes.

Why Co-created Partnerships make sense?

“‘Partnership’ has become a buzz word in almost every sector, but there is very little common language or agreement on what ‘partnership’ means. For our purposes here, a partnership is defined as:

A mutually beneficial relationship, in which the partners agree on a common purpose, contribute in different but equal ways, and in which the risks and rewards are shared.

Partnerships bring more resources and expertise to projects, enable creative and innovative solutions to issues, develop the skills and capacity of both partners and expand the practices of the partners.

Generally, there are three models, or levels, of projects, they range from simple transactional partnerships to deep collaborative partnerships.” Source: Creative Victoria

Introducing a New Approach to Succession Planning: The Strategic Fusion Approach _TM to Transitioning Your Practice

“Strategic Fusion is merely the collaborative process by which strong independent players join to

co-create something that is precious, invincible and everlasting”

– Bill Kica, Director of Business Planning, The Lerner Group at Hightower Advisors

Our approach for ensuring the conditions that create a thriving post-retirement practice is one of   progressive strategic partner-shipping. We call this process “strategic fusion”. Once you have verified that your ideal strategic partner has demonstrated the standards your practice will need to maintain and thrive you may wish to move to a more fully integrated form of strategic combination such as a full merger or acquisition.

In the interim, the opportunity exists to shape the joint venture partnership into the type of alliance that reflects your values, culture and client standards of care. Just as advisors suggest accounts be plated as TOD, you are defining who you wish to be responsible for your practice once you have made the decision to formally transition to retirement.

In our upcoming blog posts, we will look at three key components of the “Best Fit” Road Map and the role that they play in elevating your practice: We call them the “three C’s”:

• Culture
• Client Experience
• Client Value-added

To subscribe to our blog Blueprint4Growth or to schedule a confidential consultation contact us today at bkica@hightoweradvisors.com.