The Importance of Planning for a Successful RIA Handoff
As retirement approaches for registered investment advisory (RIA) firm owners, the process of handing off clients to successors can be a daunting task. However, with careful planning and proactive steps, the transition can be smooth and successful. According to industry experts, allowing around five years to implement a transition plan is crucial to ensuring that clients remain well-served under new leadership.
Melissa Caro, the founder of My Retirement Network, and Todd Doherty, the vice president of Advisor Legacy, emphasize the importance of introducing successors to clients well in advance of any transition. Client relationships are deeply personal, making the handover of a “book of business” a significant undertaking. For most clients, the advisor is the primary relationship, not the firm itself. Therefore, establishing a connection between clients and successors early on is key to retaining clients during the transition.
Effective retention methods include engaging professional consultants, selecting multiple successors, and segmenting the client base to provide early notifications to key clients. Hosting retirement parties where clients can meet successor advisors or representatives from acquiring firms can also help ease the transition. Additionally, outlining clear equity timelines and compensation arrangements for successors is essential, especially in internal succession deals where employees are becoming business owners.
The Generational Shift in RIA Succession Planning
The transfer of clients to the next generation poses challenges for the RIA industry, with a significant number of advisors set to retire in the coming decade. Research indicates that inheritors of high net worth assets are likely to switch wealth management firms upon receiving their family’s assets. This generational shift in client relationships underscores the importance of effective succession planning.
A survey conducted by Kestra Holdings and 8 Acre Perspective revealed concerns among successors about the preparedness of current owners for retirement and leadership transitions. The handover of clients emerged as a central issue, highlighting the need for qualified and aligned successors to ensure continuity in client care.
External succession deals, where smaller firms are acquired by larger ones, involve complex processes such as earnouts and retention provisions tied to client retention. Proper client notification, introduction to successors, and gradual transfer of responsibilities are critical steps in ensuring a successful transition.
Managing Client Exits in RIA Succession
While the risk of client attrition in a transition is a valid concern, data suggests that well-planned successions result in minimal client exits. Proactive steps, such as involving successors in client meetings and gradually transitioning client accounts, can mitigate the risk of client departures.
Unexpected events, such as the advisor’s death or disability, can pose challenges to client retention. The custodial repapering process involved in changing vendors can also impact client exits during a transition. However, with proper planning and communication, the expected attrition rate is typically less than 5% of assets under management.
In conclusion, successful RIA handoffs require careful planning, proactive engagement with clients, and clear communication with successors. By following best practices and engaging in strategic succession planning, RIA owners can ensure a smooth transition for their clients and business.
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