You are probably familiar with the adage “Failure to plan is planning to fail.” It’s as true today as when Benjamin Franklin first said it. Of course in order to have a plan, you need to have options to consider. And, right now, when it comes to succession planning in the wealth management space, choices can be limited for financial advisors who are considering a succession.
For all the worry surrounding the potential impact of artificial intelligence on wealth management, demographics may prove to be the real disruptor for the industry.
You have most likely seen the statistics that bear this out: the average financial advisor’s age is 58. Almost 40% of financial advisors are planning to leave the industry in the next 10 years. Upwards of 70% of advisors don’t have a succession plan. There are more advisors over age 80 than under age 30.
That’s a lot of numbers which, together, add up to a conundrum for financial advisors, particularly those looking to monetize their businesses and retire in the next three-to-five years. The solutions are few and sellers are often on their own to figure out the solve. It’s a succession planning challenge for them and for the industry as a whole.
Largely there are three choices for advisors when considering a succession.
1. A full external sale has become more common in recent years, thanks largely to the influx of private equity money and emergence of large, active aggregators in the RIA space with easy access to capital. For the right firm, prices had been much higher than they’ve been historically. With the rise in interest rates over the past year, capital is not flowing as easy, and multiples being offered are no longer at peak levels. Highly profitable advisors are still in demand, but more mid-tier practices may be disappointed by the offers they receive in the current environment.
2. A partial sale allows an owner to maintain control and provides a capital partner that may have benefits beyond a cash infusion in the form of scale and operational resources. While this is a popular solution, there aren’t as many firms willing to take a partial stake. Importantly, in many partial sales, on a price comparison basis the pro rata sale price is falling short of the full sale price.
3. An internal sale. This is among the most sought-after solutions and requires a good bit of foresight. Having the right team in place to take over the business is a process that can take years to realize. It’s important to note that in the other two sale scenarios, price often is impacted by the presence of internal successors: prices can increase with a built-in junior advisors. That’s why making the effort to develop a team of next-gen advisors is good business. The challenges for an internal succession plan are always finding the advisors, cultivating their skills and retaining them. There are recruiting firms that may help in finding the advisors, and broker-dealers or other firms that an advisor is affiliated with may also be able to help find them.
So, You Want to Sell
Once you’ve made your decision regarding the type of sale you’d like to execute, the next step is to determine whether you will represent yourself in the transaction or use one of the industry’s bankers/brokers with expertise in the area. While different firms specialize in specific sales strategies, If you manage less than $2 billion in assets, your banker/broker options are largely the same group of firms.
Firms with over $2b in AUM present a unique set of challenges, requiring more due diligence when picking a broker/bank. You will want to understand the differences between firms, the support they will deliver when representing you, and how much you are paying for that support.
Many brokers/banks have a service offering that consists of “shopping” you to a database of buyers. Beware of firms that merely plug you into a marketplace database and hit “enter.” From building a marketing presentation to market your practice to helping you align what I like to call “Feel, Fit and Financials,” you should have access to additional services to help you compare and contrast the different firms out there and help you understand the deal and term sheets. Buyers, especially PE-backed ones, are sophisticated and not as willing to come up with the multiples of even a few short years ago. Make sure you have support on your side that has the expertise to work with those buyers and help you get the most value you can for the business you have worked so hard to build.