Modern Practice Management, Pt. 2: Why Small RIAs Are Stranded When Succession Planning

While the conversation of legacy planning is common for financial advisors, the primary focus is with clients around their personal financial planning goals.  Unfortunately, it is too frequent that advisors overlook and put off their own personal legacy and succession planning needs. According to The FA Insight Study of Advisory Firms: People and Pay, 34% of respondents reported not having a succession plan in place for the firm.  What is perhaps even more alarming is that the majority of those with succession plans do not adequately address their business needs.

According to The FA Insight Study of Advisory Firms: People and Pay, 34% of respondents reported not having a succession plan in place for the firm.  What is perhaps even more alarming is that the majority of those with succession plans do not adequately address their business needs.

Data as of 2017; Source: The FA Insight Study of Advisory Firms: People and Pay

In a previous article, I discussed the 4 mistakes to avoid when planning your succession. It’s critical for all advisors to know what’s at stake when transferring business ownership, in the case of death or disability.

To those who may not be prioritizing succession planning or simply know you could be doing more—this article is for you.

The State of Succession Planning

Most established broker-dealers have an already built-in succession and contingency plan to help protect advisors and their practices. In the wirehouse or regional model, it is not uncommon for the clients of a retired or unexpectedly deceased advisor to be redistributed to other advisors in the branch office.  Previously, there was no form of compensation offered to the surviving spouse or beneficiaries as a result of an unexpected death/disability, nor to the advisor in a planned retirement.  Now, the wirehouses and regional firms are getting better about providing payment – albeit it is often nominal.  It also is not consistent across firms, so it is the responsibility of the advisor to make certain they understand what is available to them.   

The independent broker-dealer community best addresses this gap in the industry by providing advisors with readily available business continuity and succession plan opportunities.  Independent advisors have many of the following resources available to help with planning:

  • The advisor can identify and document a named successor to their firm in case of either a planned or unplanned life event using simple, internal broker-dealer documents.  This can also be established through a more formal, customized contract with various valuation, funding and protective strategies for all parties.
  • The advisor can assign the broker-dealer as the successor to provide funding to their estate and move accounts to another advisor affiliated with that broker-dealer.  One of the benefits of partnering with a larger, established independent firm is that they can oversee the process from financing, transiting and selecting the successor.
  • The advisor can also assign guardianship to their Office of Supervisory Jurisdiction (OSJ) partner, for more localized support, transition and integration into another office. This is a highly effective strategy with large enterprise offices.

Standard multiples for contingency plan payouts range between 1.5-2.5x multiples based on total practice revenues on an earn out.  It is very common to see things structured at 50% of revenues over 4 years to be paid to the surviving spouse, beneficiary or estate.  However, a formal, contracted plan will typically fetch 2-3.5x multiples on total practice revenues based on a valuation with fixed payments, larger upfront monies and shorter terms.

There are no excuses for an independent financial advisor not to have a proper contingency and succession plan in place. If you do not, take steps immediately to do so for the benefit of your clients and family.  And while you can take quick action with many “form-based” plans (they are better than nothing), I want to emphasize the importance of finding and working with the right partners to help you through creating a custom contingency and succession plan, including the deal structure valuation process, terms, financing, etc.   

However, there’s another type of advisor who is most at risk when succession planning that needs to pay particular attention—the solo practitioner who conducts business through their own RIA or Hybrid RIA.

Why Small RIAs are Stranded and at RISK

Solo practitioners who conduct business through their own RIA—regardless if it is a hybrid model or fee-only practice—benefit from being independent, but they also are figuratively stranded on a deserted island if they don’t adequately plan.

“Over the past couple of years our attorneys have seen this as a growing pain point for the industry,” said Michelle L. Jacko, Managing Partner of Jacko Law Group P.C. “Regardless the size of the firm, a plan should be in place for any untimely or unexpected event. Firms need to be proactive and cover the bases when navigating any form of succession plan.”

Let’s take John for example, an advisor whose CPA recently called asking if he would be interested in buying the his deceased brothers-in-law’s practice. The deceased advisor was a solo practitioner with a fee-only practice advisory firm with $20 million AUM custodied at a single custodian; he had no succession or continuity plan in place, and the death was sudden.

John contacted us for guidance.  He asked if he could buy the deceased advisor’s practice, and we posed the simple question: “Legally buy what and from whom?”

The deceased advisor did not have a defined succession or contingency plan in place.  Since he conducted his business through his own RIA, he did not have an RIA to RIA agreement that allowed him to share client information with another entity.  Moreover, his RIA had not named a successor owner, i.e. someone who could engage with another RIA firm to discuss partnership.  Finally, the RIA did not have the proper information sharing disclosures in place. 

So, here was the rundown:

  • No contingency or succession in place with another RIA firm
  • No information sharing arrangements with another RIA as a result of succession or contingency event
  • No contingent officer in the RIA to at least “sell” a client list (refer to the aforementioned bullet)
  • No information could be legally shared with anyone, by anyone


For numerous small RIAs across the country, this is a real concern.

Even the most simplistic purchase agreement for an RIA requires several steps prior to execution:

  • Engagement of third-party to determine business valuation;
  • Consultation with attorneys to negotiation terms;
  • Filing updated Forms ADV and preparing other disclosures documents to reflect new ownership; and
  • Client disclosures to acknowledge transfer of ownership.

If this sounds like a logistical nightmare, that’s because it can be! Small RIAs often pride themselves on being some of the most “independent of the independents” of the financial services industry, but this means that they’re isolated without legitimate succession planning—creating a mass of red tape that could be avoided.

“Firms sometimes don’t know what to expect when it comes to drafting or creating sufficient succession plans,” said Jacko. “Our team frequently counsels clients from the very beginning. This often includes reviewing the current corporate structure of the firm, assisting with short-, mid- and long-term succession needs, negotiating the structure and terms of buyout (including promissory notes, employee stock option plan and/or key person insurance), memorialization of the Succession Plan, and more. There are many components to ensuring any succession plan is comprehensive—firms need to understand that without an effective plan in place they’re setting their business, employees and so many other people up for headaches and complications in the future.”

Avoid the Lose-Lose-Lose Situation

When you put off such an important task as succession planning—it’s a lose-lose-lose situation for everyone involved: your business, your clients, and your family.

  • Your business loses when you don’t take the time to find the right successor. As seen in the previous section, it’s a enormous hassle to work around confidentiality and regulatory restrictions during business transfers—and who’s going to own this process after your death?  Moreover, if you have staff, well, they become immediately unemployed.
  • Your clients lose their valued relationship with their advisor, which is as difficult to replace as a doctor, counselor or other trusted professional in their lives. Don’t abandon the people you spent your career guiding because you didn’t think things through.
  • Your family loses because they’re stuck picking up the pieces during a time of mourning. You should be leaving a legacy for your loved ones, not a complicated mess that they’re likely not qualified or capable of cleaning up.

By focusing on succession planning now, before it’s too late, you can prevent wreaking havoc on all the people who matter most to you.

There’s a Better Way to Plan

If you have questions about how to establish succession and contingency strategies as an independent RIA, our team at The Financial Services Network can help. We serve over 300 advisors nationwide, offering six core areas of focus, including compliance, operations, virtual administration, and technology consulting.

We have worked with advisors who consolidated their RIA and level-up serviceability with our organization. We’ve also assisted RIAs who maintain their autonomy and leverage our scale and infrastructure to suit their needs. 

By partnering with The Financial Services Network, you gain:

  • An automatic guardianship plan to find the right successor(s)
  • Assistance and facilitation with all transition paperwork
  • Easy-to-understand messaging for your clients
  • A point of contact for your surviving spouse or beneficiary
  • Guidance on how to navigate through legal and compliance challenges

By working with experienced legal counsel who has expertise within the financial services industry like Jacko Law Group P.C., you will be taking the necessary steps to protect your practice and all of those who’s lives you impact.

We have the experience and expertise to help you, and most importantly your business, your clients and your family, through whatever the future may hold.

Need assistance with succession planning? Contact us to get started.