Ignore These Advisor Succession Trends at Your Own Peril

What You Need to Know

A lack of succession planning by established financial advisors is emerging as a serious issue for the future of the wealth management industry.
Fortunately, firms that put the appropriate amount of energy and attention into succession planning can achieve success.
This is especially true when firm leaders are willing to ask deep questions about where the true value of their enterprise lies.

The lack of sufficiently sophisticated succession planning by established financial advisors is emerging as a serious issue for the future of the wealth management industry, and there is a real chance that the mass retirements of advisors in the coming decade will result in painful disruptions for firms and their clients.

In fact, according to Matt Matrisian, chief channel officer at AssetMark, the dearth of succession planning is one of the topics that comes up most frequently in his regular meetings with the leaders of different types of advisory shops — from the biggest broker-dealers to the smallest independent registered investment advisors.

Sitting down for a recent interview with ThinkAdvisor, Matrisian warned that many leaders in the advisor industry underestimate just how challenging it can be for firm owners and leaders to pass the baton to the next generation.

On the one hand, sourcing great next-generation talent is never easy, nor is instilling the leadership lessons that are required for the lasting success of any financial services organization. On the other hand, potentially thorny issues related to compensation and the financial aspects of firm ownership transitions can sour relations between today’s firm leaders and the leaders of tomorrow.

Fortunately, as Matrisian explained, firms that put the appropriate amount of energy and attention into the challenge of succession planning can reliably achieve success. This is especially true when firm leaders are willing to ask deep questions about where the true value of their enterprise lies.

A Growing Concern

Given the nature of AssetMark’s business in general and Matrisian’s role in particular, he has frequent conversations with advisory industry leaders who are looking to solve emerging challenges in their respective firms.

“I talk to a variety of different executives on a regular basis, and it has been eye-opening to see how frequently this topic of succession planning comes up,” Matrisian said. “Many of them ask me whether an organization like ours can help their advisors put together more effective continuity planning and succession planning.”

As Matrisian explained, forward-thinking leaders already know they need to get some type of plan in place to be able to protect their firm, protect their assets and help them to grow talent within their organization.

“However, because succession planning and the act of leaving the business is going to be such a personal issue for each individual advisor, that makes succession planning at scale a real challenge,” he explained. “So, that’s one interesting thing we are working on here at AssetMark — looking at how we can play a role in delivering more of a scaled succession model.”

Solving Problems and Building Value

According to Matrisian, the best way to achieve good outcomes in the succession planning effort is to think about succession not as an isolated topic, but rather to view it more holistically and from the lens of building sustainable enterprise value.

“For example, one tactic we have been discussing is that firms that are not already set up to operate in a hybrid RIA-BD model should seriously consider starting their own RIA and becoming a hybrid firm,” Matrisian said. “You can have investment advisor reps rolling up within that entity, and it creates an easier succession model, because as the RIA, you effectively have ownership of the underlying assets.”

Matrisian said he is also having discussions about the idea of hiring more W-2 advisors within RIAs, including both younger advisors who are just starting out but also older advisors who have established books of business that will need to be transitioned to the next generation in the years ahead.

“We’ve actually seen some firms take this one step further, and they’ve gone out and they’ve sourced capital and actually bought out bigger groups of advisors who then continue to serve as W-2 employees,” Matrisian observed. “This will be a very attractive opportunity for those established advisors who want to take some chips off the table but also still want to be involved.”

Another interesting approach he has seen is when a firm acquires a revenue stake in an advisor’s book of business as a means of starting a longer-term transition planning effort.

“Let’s say you are producing $1 million in new assets per year,” Matrisian proposed. “The firm can come in acquire, say, 20% of your revenue on those assets, and they will pay you up front between three- and four-times the revenue amount for that 20% stake.”