The Best Successor Is Right There, If You Know How to Look

Author: Dan Kreuter

As an advisor, you recognize the pivotal moment to sell and must choose a successor. Often, the choice leans toward a vibrant, rising advisor whose existing book roster promises continuity and financial advantage, effectively covering costs and enhancing your firm’s value.

After all, this is not just about selling: It’s also about your legacy and ensuring the future of your business.

Given all that, it sounds like a great strategy. However, if you’re not strongly positioned to make this happen, it’s akin to asking your investment banker or headhunter to find you a “bag full of cash.”

If the desired successor advisors are a W-2 employee in a bank, brokerage firm or competing RIA, oftentimes they are bound by some sort of non-compete — and regardless, they don’t typically “own” their clients — and are almost always legally and technically owned by the former firm.

The advisor may leave, but there’s no guarantee that clients will follow — although a legal battle might. 

Why would a successful advisor join a particular firm? What do acquiring firms have to offer that’s so valuable?

Key Questions to Ask

Before traveling down that route, consider attracting an already independent, self-employed, (read: smaller) advisor with a book they actually own, a client following and an existing practice. Yes, they do sell or merge with larger RIAs on occasion.

But you should ask yourself, “Why should they join my firm? Would I join my own firm if I were in their position?” 

Acquiring advisory firms claiming excellent tech and support isn’t enough. When was the last time you heard someone win a new business saying that their tech crashes and that their personnel are lazy?

Acquiring firms can highlight their technology and support staff to prospects while they’re in the process of wooing them, but it is delusional to believe that’s the main event. And any advisor joining your firm won’t really know how good your technology or support staff is until they are under your tent. 

Seal the Deal

Instead, focus on offering transition incentives, competitive payouts, equity, client prospects, lead flow, marketing, and access to your investment strategy and other services if you have them.

If you’re recruiting or acquiring the “advisor with a book,” whether they’re a 1099 or W-2 employee, you will need to provide a check.

As an acquirer, you are competing against extremely well-capitalized firms, some of which will have a national presence or brand with readily deployable capital on their balance sheets or major private equity backing. I know you might be “better,” more ethical, more objective. But money talks.

Payouts are sticky wickets. As an acquiring firm, you can do better than most W-2 types coming from a grid formula, and while there are independent 1099 advisors who are getting under-incentivized and your formula could be better, the advisors who own their practice are on the top line working with close to 100 pennies on the dollar.

We know it’s “what you take, not what you make,” but you’re typically not going to win the payout battle with these independents.

Equity is a form of currency and, in today’s mergers and acquisitions environment, is a valuable one. We’ve seen great matches occur where the senior, larger RIA acquires (really merges) with a junior, smaller RIA, but are you truly ready to share equity? 

Key Tools for Lasting Success

Advisors with a long runway will be intrigued if you can get them more at-bats with good client prospects. But is there actually any “there, there?”

The successful aggregators have proven capabilities in generating leads through significant investments in digital marketing, public relations and access to the custodial referral programs (where the price of participating keeps going up). Can you legitimately claim you have a proven, repeatable, scalable lead flow capability? 

Often, negotiations break down over passive/index versus active, custom portfolios vs. model portfolios, alternative investments, insurance, holding securities licenses, and so forth.

No one should tell you how to run your business and engage with clients; what you do and how you do it has made you successful. But unless you have a lot of investment options under your roof, only a subset of the target market will fit your model.

To be fair, RIAs sometimes do find that “bag of cash.”We did business with with a firm that figured it out, but that was in a different place and time. Occasionally, you do see a firm that hires/acquires an advisor with a book, usually a friend of the firm, but this is serendipitous, opportunistic, and not an achievable or repeatable strategy.

Successfully securing next-gen talent lies not in unicorn chases but in a dual approach: fostering internal talent ripe for growth and strategic external recruitment.

Consider recruiting a promising next-gen advisor who may not have a big book of clients yet but has the potential to grow with your firm. It’s about nurturing their skills and aligning them with your firm’s culture, investment strategies and vision for the future.

If your firm is already bustling with clients and you’re struggling to keep up, consider bringing in a new protégé and hand over part of your client portfolio. This approach works well whether you need a savvy financial planner or a detail-oriented portfolio specialist.

To start the search process, find a firm that helps you tailor the job specifications, candidate profile and compensation package to fit your needs. An added bonus is if that firm uses behavioral profiling to make sure the fit is just right, reducing the risks involved in hiring.

Remember, it’s not about finding a mythical perfect advisor; it’s about finding someone who’s eager to be part of your team and can contribute significantly to your business. With a strategic talent acquisition strategy and the willingness to invest in the right people, you’ll find a suitable match. And maybe construct that mythical bag of cash!  

Here are five examples from our M&A advisor, Gladstone Associates, and our executive search unit, DAK Associates, in RIA growth and succession that illustrate the many possibilities of succession planning: 

  1. Midwest RIA success: Faced with the challenge of replacing two exiting advisors and a retiring founder, a mid-sized RIA in a small Midwestern town sought our help. Rather than buying an advisor with an existing client book, we recruited a national firm’s W-2 advisor looking for growth opportunities in a boutique setting. Fast forward, and this advisor is now successfully running the firm.
  2. Strategic recruitment for growth: An RIA with $700 million in assets, known for its unique investment strategies, needed a successor for its retiring founders. Initially aiming to acquire an established advisor, they shifted gears. With our help, they brought in a promising CFP from a larger firm, aligning perfectly with their culture and growth plans. Remember, it’s not about finding a mythical perfect advisor; it’s about finding someone who’s eager to be part of your team and can contribute significantly to your business. 
  3. Nurturing future rainmakers: An expanding ultra-high-net-worth RIA developed a program to groom next-gen talent with “rainmaking” potential. Our role? To find individuals with the right mix of skills and personality. The result? Three promising advisors were brought on board, poised to add significant value and potential to the firm.
  4. A match made for growth: An ambitious $600 million RIA wanted to expand. We facilitated a match fueled by an equity swap with a $200 million advisor, leading to a powerful partnership. This strategic union propelled the firm’s growth, crossing the $1 billion mark and leading to a successful acquisition by a national player.
  5. Smart succession planning: An RIA specializing in pre-retiree financial advice faced a particular challenge: replacing retiring advisors with fresh talent. The solution? Identifying younger advisors eager to take over existing books. This strategy led to significant growth, increasing the firm’s assets to $1.8 billion and a successful sale.

 There are two more points worth exploring further, when the time’s right. 

One is buying the book of an aging “sunsetting” advisor. A bit tricky and client diligence is key, but there are a lot of these practices.

Two, if you have been unsuccessful in trying, maybe unwilling or not interested in figuring out how to find that next-gen bag of cash through recruiting or acquiring, you can always sell!