Succession Planning 101 for RIAs

As recently as last Spring, the SEC was considering a rule that would require RIAs to implement written business continuity and transition plans.1 The primary purpose of the proposed rule was to protect clients and investors from adverse events that could disrupt or interfere with an RIA’s ability to manage their assets. While the rule has since been withdrawn from consideration, it represents a growing concern over the preparedness of aging advisors as they approach retirement.

According to a recent Cerulli Associates study, 28 percent of advisors who are 55 or older are unsure about who will take over their firm.2 Another recent study showed that only about one third of advisors between the ages of 60 and 64, and less than half of advisors over the age of 65, have a formal succession plan in place.Developing a succession plan is crucial if you want to try to ensure that your RIA thrives after you depart, that your employees are positioned for success and, above all, that your clients are left in good hands.

If you are one of the many advisors who has yet to develop a formal succession plan, it’s never too late or too early to start preparing. The first step in developing a succession plan is to take some time to contemplate your retirement goals. Below are a few key factors to consider.


When do you think you’ll be ready to retire? Some advisors still enjoy their jobs and stay actively involved in their RIAs well into their 70s, while many others will see their energy and job satisfaction diminish as they approach retirement age. Some business owners often overlook the emotional aspect of succession planning. If you still have goals that you want to achieve and still find your work rewarding, stepping away too early can be emotionally challenging. There’s nothing wrong with staying active in your RIA past the age of 65 to reach your goals, but it’s important to set a deadline for achieving them as part of your succession plan.

Another timing-related aspect to consider is the age of your clients. Nearly half of RIA clients are over the age of 60, and almost 20% are over the age of 70.4 If elderly clients represent a significant portion of your total assets under management, you should consider how eventual intergenerational wealth transfers may impact your business. By some estimates, less than 30 percent of beneficiaries maintain their benefactor’s financial advisor, which means that older advisors with older clients face a greater risk of client attrition.5 Trying to transition ownership to your successor or selling your firm will be far more challenging if you are losing clients in the process. Succession planning can help mitigate such risk.

Who Will Take Over Your RIA?

Who do you want running your RIA after you retire? Will it be someone within your firm or do you see yourself selling to, or merging with, another RIA? Your options really come down to an internal or external sale, and your choice should be based on what you want for your family, clients and employees, as well as your own personal and financial goals.

Internal Sale
Approximately 75 percent of advisors expect an internal successor to take over their RIA, but nearly 25 percent have yet to identify who the successor will be.6 An internal successor could be an existing partner, a family member, or a younger advisor within your firm.

Existing partner: A 2015 study showed that 15.2 percent of advisors planned to pass ownership of their RIA on to an existing partner or principal.7 This may be an option if you have a business partner who is willing and able to buy you out and continue running the firm, and one who is not also nearing his or her own retirement. Disputes over value often arise during partner buyouts, especially in the absence of advanced planning. However, you can reduce the potential for such disputes by drafting a buy-sell agreement years in advance. Buy-sell agreements can be used to establish the framework for how a transaction will be facilitated when you exit the firm and define the mechanism that will be used to determine the value of your shares.

Family member: Do you have a younger family member involved in your firm? Have they shown interest in staying with the firm long-term, understand the business well, and demonstrated the ability to lead? Passing ownership of your RIA to a family member can help preserve your firm’s culture and may also make it easier to retain longtime clients than if you were to pursue an external sale. While there are multiple ways to structure a transaction between family members, you may want to start planning by considering gifting strategies that will reduce the tax liability associated with the transfer of ownership.

Employee: Do you have a talented young advisor who excels or an experienced manager who helps oversee your firm’s operations? Many advisors like the idea of someone they already employ eventually taking over the firm when they retire. It’s best to identify who you want your successor to be at least several years before you plan to retire. Doing so will give you enough time to mentor and train them as your eventual replacement. You will also need time to determine how to facilitate the transaction, as internal sales typically don’t occur as a one-time transfer of ownership in exchange for a lump sum. Most commonly, internal transfers of ownership are seller-financed since most individuals don’t have the savings or the ability to secure third-party financing. However, there are a few RIA-focused lenders that do provide financing for internal ownership transitions.

Advisors who expect to sell internally, but have yet to identify a successor, should start their search immediately. While mentoring and training can take years, the real challenge may be finding the right person. Over 40 percent of advisors are within ten years of retirement age and few young professionals and college graduates are interested in a financial planning career.8 The industry will face a shortage of around 200,000 advisors by 2022, according to one estimate.9 As a result, the RIA industry’s existing talent shortage should only get worse. That means that finding an advisor capable of leading your firm will become increasingly difficult.

External Sale

Selling your RIA is another succession option that can provide significant benefits for you and your family, your clients, and your employees.

M&A activity within the RIA industry is at an all-time high, and while there is plenty of demand for quality acquisitions, there are not as many sellers.10 Competition for deals has driven up valuations across the industry, which means it’s easier for sellers to command a premium over fair market value for their RIAs. In many cases, selling to a third-party can provide a greater financial benefit to the seller compared to an internal sale. Internal sales are often completed over a longer period, most commonly through seller financing. An external sale will typically bring the seller a larger up-front payment and a potential earnout component. In the current industry M&A environment, sellers can not only negotiate a higher sale price, but also use their leverage to command more cash at closing.

While the financial impact of succession planning is important, many advisors are more concerned about the future of their clients and employees. An external sale can help you provide your clients and employees with additional resources and opportunities. One reason why many sellers choose an external sale is to gain access to technology and resources that they can’t currently offer clients. A larger firm may be able to offer your clients complementary, value-added services or additional investment options. They also often have tools and technology that help advisors provide better advice and a better overall client experience.

The ability to provide clients with better service ultimately benefits the advisor as well. For example, the same tools and technology that contribute to better advice and a superior customer experience, such as financial planning and rebalancing software and portfolio management and reporting systems, also help make the advisor more productive and efficient. These tools can also help make it easier to acquire and retain clients. Larger firms can also provide operational support and take care of compliance and other administrative functions that tend to be a major burden to owners of smaller RIAs. Affiliating with a larger firm may also provide more advancement opportunities for younger advisors.

Selling Outright vs. Recapitalizing

Sellers have more than one option when it comes to an external sale. You can sell 100 percent of your RIA or sell just a portion of your firm through a recapitalization. The benefit of a complete sale is that it will allow you to retire quicker and provides immediate liquidity, although it may involve a short transition period to ensure client relationships are transferred smoothly to the new advisory firm.

A recapitalization is another increasingly popular succession option for advisors because it gives RIA owners an opportunity to remain actively involved in their firms while liquidating a portion of their ownership. This allows the RIA owner to diversify their net worth, as opposed to most of it typically being tied up in their business. By selling a portion of your RIA to a larger firm, you can more easily maintain your existing client relationships while also gaining access to resources that were previously out of reach. Such resources can help you to grow your firm’s assets under management. A recapitalization is typically structured so that the seller will be able to sell his or her remaining equity when they decide to retire. Retaining some equity while continuing to grow your RIA means you can receive more overall proceeds by the time you retire than if you had initially sold 100 percent. If you aren’t ready to step away entirely but are searching for ways to grow your business and provide opportunities for your employees, a partial sale might be the right strategy.

Getting Started

Succession planning starts by articulating your goals and figuring out what you need to accomplish in order to achieve them. Developing a plan for achieving your goals should start by evaluating where you stand today. For any business owner, that typically means obtaining a valuation or strategic assessment. Whether you anticipate an internal or external sale, the transition of ownership will likely involve a significant liquidity event representing your largest asset. As most wealth advisors know, it’s difficult to adequately plan for your post-retirement financial future without knowing how much your assets are currently worth.

Further, consulting a firm with expertise in the RIA industry can help you define your goals and outline various strategies and potential deal structures that could help you achieve your objectives. An experienced M&A advisor can also help you obtain a potentially better deal if you try to pursue an external sale. M&A advisors provide value by using their expertise to generate a competitive sale process between multiple parties, which is the key to securing a premium valuation and a superior overall outcome for your RIA.

On a final note, it’s important to remember that one of the biggest mistakes that any business owner can make is to hold off on exiting their company until things aren’t going well. Running a business is easiest and most satisfying when things are going well, so it’s natural that many owners would find it difficult to walk away under such circumstances. However, the last thing you want is to start looking for a successor or an external buyer while your RIA is dealing with problems such as retaining clients, attracting talent, maintaining assets under management, or staying profitable.


1 U.S. Securities and Exchange Commission. Release No. IA-4439; File No. S7-13-16.
2 InvestmentNews. Advice Business Must Improve Succession Planning. March 2018.
3 Focus Financial Partners. Succession Planning: Protecting and Enhancing the Future of Your Business.
4 State of the RIA Market: Market Sizing & Practice Management Issue. January 2018. Envestnet.
5 Trulytics. The Coming Intergenerational Wealth Waterfall. McSheffrey, Brandon. July 2017.
6 Focus Financial Partners. Succession Planning: Protecting and Enhancing the Future of Your Business.
7 The Cerulli Report. RIA Marketplace 2015.
8 Time. A Young Financial Advisor Is Hard to Find.
9 InvestmentNews. Shrinking Talent Pool Puts Strain on Advisory Firms.
10 ECHELON Partners. RIA M&A Deal Report: U.S. Wealth Management. January 2018.

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.