Buy-Sell Agreements for Wealth Management Firms

There are roughly 13,000 Registered Investment Advisors (“RIAs”) in the U.S., and each tailors its services to a unique set of clients and maintains an individualized business model. Be that as it may, most who call us face one common issue: ownership succession.

Ownership can be the single biggest distraction for a professional services firm, and it seems like the wealth management community feels this issue more than most. In Schwab’s 2019 benchmarking study, which surveyed 1,300 RIAs, a full 92% of respondents indicated that they were considering internal succession, but only 38% of firms have a documented path to partnership.

Most wealth management firms are closely held, so the value of the firm is not set by an active market. They are typically owned by unrelated parties, whereas most closely held businesses are owned by members of the same family. Compared to other industries, a greater-than-normal proportion of wealth management firms have significant value, such that there is more at stake in ownership than most closely held businesses. Consequently, when disputes arise over the value of an interest in a wealth management firm, there is usually more than enough cash flow to fund the animosity, and what might be a five-figure settlement in some industries is a seven-figure trial for these businesses.

Avoiding expensive litigation is one reason to focus on your buy-sell agreement, but for most firms, the more compelling reasons revolve around transitioning ownership to perpetuate the firm and provide liquidity for retiring partners. Clients increasingly seem to ask us about business continuity planning— and for good reason. In times of succession, tensions can run high. Having a clear and effective buy-sell agreement is truly imperative to minimizing costly and emotional drama that may ensue in times of planned or unplanned transition.