Success and Succession Offers Targeted and Often Unexpected Insights on Internal Ownership Transition at RIAs

Practice Management Transactions

As the Baby Boomer generation continues to age toward retirement, many “founder-centric” asset management firms face the prospect of internal succession. The recent book “Success and Succession,” by David W. Bianchi, Eric Hehman, Jay Hummel, and Tim Kochis, is written from the perspective of three individuals who have experienced successful ownership transitions. The book provides some interesting insights into the logistical, financial, and emotional process that internal succession entails through colorful accounts of past triumphs and train wrecks.

Some of the authors’ perspectives and insights are what one might expect. Operational realities cause many asset management firms to revolve around a key man, who may not prioritize a strategic succession or may lack a viable successor. He or she may have flawed beliefs that could doom the transition process, including the insistence that the firm remain the same following succession or the assumption of an unreasonably high valuation of the firm. While ownership transition should celebrate the achievements of the founder, it must also recognize the need for change in order to continue to serve the clients. Clearly, client communication during the transition is crucial, especially for a founder-centric firm in which the majority of client meetings and responsibilities have fallen on the exiting owner.

Much of the above, while important, has been said by many others in many forums. The strength of “Success and Succession” is in more than a handful of unique insights into RIA ownership transition which get little if any attention from other industry commentators.

  • Both the founder and the successor need to be aware that firm-wide growth often declines in the first year following the change in management, as the founder-centric firm shifts its brand image and the successor takes on responsibility for creating new business. If a successor is unaware of this trend, he or she could feel additional stress regarding the financial burden he undertook when buying out the former owner. The founder could feel the need to resume fulltime involvement in operations, fearing for his ongoing financial benefits from the firm. The authors advise both founders and successors to take a long term view and not focus on this short term pullback.
  • Regardless of the firm’s performance in the first few years following succession, both the founder and the successor need to set definite (as in finite) expectations regarding the founder’s continued involvement or lack thereof. The founder should remain accessible, as his or her guidance is crucial when the successor faces major issues early on. But it should also be clear to everyone that the successor is now the one charged with minding the store.
  • Though some things do need to change following a succession of management, the successor should avoid creating new positions to retain people who no longer fit into the firm’s long term goals. One benefit of succession is that the new manager may have a fresh perspective on areas of the firm in which cost cutting measures or other efficiencies are possible. Although it may be difficult to assess which employees should remain after the transition, allowing those who are poor fits to remain with the firm does significant damage to the firm’s culture and does not set the proper tone for post-transition success.
  • It is crucial to separate compensation for labor from profit share rewards as the exiting owner becomes less involved in day to day management of the firm. This issue can be resolved through the establishment of a strict reinvestment versus distribution policy going forward. The authors even suggest that the founder employ an independent financial advisor in order to objectively estimate a fair amount of compensation following the sale.
  • Though it is clear that the founder took on a significant amount of financial risk in the creation of the firm, it must be noted that the successor is also taking on risk in the amount of debt he or she must incur to buy out the owner. Both parties have a lot to gain and a lot to lose in the process of succession, and both bear a significant emotional burden. The founder may perceive the transition as a loss of a personal identity that is tied to the firm, and the successor must now bear the responsibility of the ongoing success of the firm.
  • Controversy over what is fair or what is “enough” in terms of a sale price can be resolved through a third party valuation. While it might seem easier to rely on valuation metrics or attractive examples, these tactics are purely short term solutions and can result in overly optimistic estimates. The financial terms of the valuation are already emotionally charged. A third party valuation can provide a much needed “reality dose.”

All in all, the book is a practice-management must read for RIA owners contemplating succession – whether they are on the buy side or the sell side. Our experience advising clients on internal succession, in particular, is that successful transition requires a certain level of patience and humility on the part of both founder and successor, but above all long term commitment to a process rather than an expectation of a near term result. The book plugs the necessity of a third party valuation – and we would certainly second that – but we would add that a third party advisor with experience can often provide much needed perspective to keep a succession process realistic and give it the maximum opportunity to work for everyone.