8 Steps for a Smooth Internal Succession
Surveys consistently point out that most RIAs are not prepared or are underprepared for a succession in the event of the death, disability or departure of the founder or other key personnel. In fact, fewer than half of RIAs have succession plans in place.
Failing to proactively engage in such planning can lead to disaster for the firm’s founder as well as the firm’s clients and employees should key personnel unexpectedly die or become disabled without a full succession plan in place.
While some RIAs may find it appropriate or necessary to find external parties to facilitate the transition through a merger or sale transaction, many prefer to transition ownership internally to existing next-generation employees.
The following highlights the importance of succession planning, provides a blueprint for advisors seeking to develop and implement an internal plan, and highlights best practices for an internal succession.
Why Plan for a Succession?
A lack of a well-structured succession plan can put an RIA’s entire operation at risk in the event of the death, disability or departure of the founder or other key personnel. Below we highlight four key reasons why advisors should plan now for succession.
1. Succession planning is in the best interest of clients as it helps to ensure continuity of service in the event of the death or disability of key persons.
A well-executed transition instills confidence in clients, minimizing the risk of attrition during the transition phase.
2. Proper succession planning can help a firm’s founders clearly outline their goals for the eventual transition of their leadership as well as identify their personal goals with respect to the eventual succession.
3. Succession planning is often critical for the professional development and retention of key employees. Investing in their growth and development not only prepares them for leadership roles but also fosters motivation and loyalty to the firm. This, in turn, nurtures a culture of growth within the firm.
4. A successfully executed succession plan can enhance the value of an advisory firm, making it more attractive to potential investors if the founder decides to sell equity to outside investors.
Key Steps in the Process
Transitioning ownership to next-generation employees is a multifaceted process that demands deliberate planning and execution. Below we highlight eight key steps that firms must take to plan for a smooth succession.
1. Identify one or more individuals within the firm with the potential to take on leadership upon transition.
Firms should seek out candidates with not only the requisite technical skills but also strong leadership qualities, integrity, and a firm commitment to the organization’s values and clients. Founders should identify the roles and responsibilities that such employees should assume in the event of a transition.
2. Once potential successors have been identified, the founder should collaborate with such employees to create a development plan tailored to the firm’s and their specific needs.
This plan should encompass targeted training, mentoring and exposure to different facets of the business, including client management, operations, compliance and strategic planning, as appropriate.
3. RIAs should set clear expectations for the transition, with effective communication crucial during the planning process.
Founders should clearly articulate the benefits of the succession plan for next-generation employees, expectations regarding their roles and responsibilities, the timeline for management and leadership transition, and any specific performance metrics or milestones such employees are expected to achieve. Overpromising can lead to disappointment and perhaps the departure of key personnel.
4. Founders must adequately prepare clients for the transition.
It’s vital for firms to allot a sufficient amount of time before the transition to introduce key employees to clients and to help them establish and nurture relationships, gradually taking on more responsibility for client interactions. This will reduce the likelihood of attrition during the transition.
5. Founders must determine how next-generation employees will participate in the equity of the firm going forward.
