Succession Planning for Investment Management Firms

The Best Time To Plan Is Now

Practice Management

Succession planning has been an area of increasing focus in the investment management industry, particularly given what many are calling a looming succession crisis.  The demographics suggest that increased attention to succession planning is well warranted: over 60% of RIAs are still led by their founders, and only about a quarter of them have non-founding shareholders.  Yet when RIA principals are asked to rank their firm’s top priorities, developing a succession plan is often ranked last.

What Is a Succession Plan?

Despite the headlines suggesting a wave of strategic takeovers will ultimately consolidate the investment management profession, the reality we’ve encountered suggests that most RIAs will transition ownership and leadership from one generation to the next internally.  The reasons for this are fairly obvious.

Many RIA owners prefer working for themselves, and their clients prefer working with an independent advisor.  Internal transitions allow RIAs to maintain independence over the long term and provide clients with a sense of continuity and comfort that their advisor is in it for the long haul.  Further, a gradual transition of responsibilities and ownership to the next generation is usually one of the best ways to align your employees’ interests and grow the firm to everyone’s benefit.  While this option typically requires the most preparation and patience, it allows the founding shareholders to handpick their successors and future leadership.

When RIA principals start thinking about succession, price is usually top of mind.  While this is an important aspect of a succession plan, we would suggest, instead, that the appropriate starting point for the business is strategic planning.  A comprehensive succession plan for an RIA will not only include how ownership gets transferred but will also detail how the next generation of management will assume client relationships and firm oversight.  The goal of succession planning is building a firm and client relationships that can endure beyond the end of the founder’s career.  It’s not just about selling equity.

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One of the keys to understanding succession planning is understanding what it is not.

A Succession Plan Is Not…

A succession plan is not a continuity plan.  A continuity plan ensures that your clients will have uninterrupted services in the event of a disaster.  Your eventual retirement should not be treated in the same manner as a sudden death or earthquake.

A succession plan is not an exit plan.  An exit plan is a business owner’s strategic plan to sell their ownership to realize profits or limit losses.  Strategic transactions rarely obviate the need for succession planning.  Leadership transition issues can still loom large after a significant transaction.

The Time To Plan Is Now

If you’re a founding partner or selling principal, you have several options, and it’s never too soon to start thinking about succession planning.  Proper succession planning needs to be tailored, and a variety of options should be considered.  See our whitepaper for more information on succession planning, and feel free to reach out if you have any questions.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of asset managers, wealth managers, independent trust companies, broker-dealers, PE firms and alternative managers, and related investment consultancies.