How RIA owners should hand off clients to successors

This is the 29th installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.

Registered investment advisory firm owners expecting to retire in coming years can often successfully hand off their clients far more smoothly than they may fear — provided they give themselves enough runway.

The transfer of a so-called book of business from one advisor to another is likely the most valuable aspect of a succession plan, but it can also be the most difficult. Financial advisors who want to ensure their clients remain well-served under successors must take important steps well in advance of any transition to avoid them dropping the firm. 

Advisors should allow around five years to implement their transition plan. Proactively introducing their successor to clients during this period makes them much less likely to walk out the door, according to Melissa Caro, the founder of coaching and training firm My Retirement Network, and Todd Doherty, the vice president of acquisition and legacy with coaching and consulting firm Advisor Legacy.

Handovers can turn difficult for RIAs because client relationships are “a really big part of peoples’ lives, almost like an extended family,” Caro said.

“Most advisors, in my experience, don’t start this early enough — handing over a book is not just an operational move,” she added. “For most clients, the advisor is the relationship, not the firm. I think that’s what’s really important. It’s not just a matter of saying, ‘Hi, I’m retiring and now you’re in the great hands of so and so.’ That is startling to a client. You can do whatever you want, but I think that retention is on shaky ground.”

Effective retention methods include engaging professional consultants and picking several successors instead of just one. Advisors can also segment their client base, giving the biggest or most significant customers the earliest heads-up about any succession deals or M&A transactions, Doherty said. Throwing retirement parties where clients can interact with successor advisors or representatives of any outside buyers is a nice approach. Outlining solid equity timelines and other compensation arrangements for successors are a must with internal deals, he noted.

“They’re employees becoming business owners — this is why it’s best to do it over a longer period of time where they’re buying tranches of equity over a number of years,” Doherty said. “Most of them have never owned a business before.”  

READ MORE: What’s wrong with the big RIA model, straight from advisors’ mouths

The generational shift

The process of transferring clients to the next generation carries risks for a field in which more than a third of advisors managing over 40% of the industry’s assets plan to retire in the next decade. Even the most valuable clients could be up for grabs in that transition, with one study finding that over 80% of high net worth inheritors say they will switch wealth management firms upon receiving their family’s assets. 

And many successors or potential equity recipients eager to take the reins of an advisory practice report concerns about succession at their firms, according to a survey earlier this year by Kestra Holdings and polling firm 8 Acre Perspective of 180 owners and 89 second-generation advisors at companies with at least $750,000 in annual revenue. Only 30% of the next-generation (“G2”) successors who view the owners (“G1s”) of their advisory practice as unprepared for a retirement and leadership transition say they’re committed to staying with the firm. On the other hand, almost 75% who do view the owners as prepared for the transition say they’re committed to remaining with the firm. And the handover of clients is at the center of the problem that the report described as a “succession misalignment” between the advisors.

“G1s’ No. 1 goal in succession planning is ensuring their clients continue to be well-cared for, which requires highly qualified and trained G2s,” the report said. “And finding G2s with aligned values and vision is by far their number one challenge — identified as a significant obstacle by 53% of G1s.” 

The transition certainly involves challenging tasks, especially when, as is the case in most external succession deals, a smaller firm sells to a larger one, said Dominique “Dom” Henderson, the founder of Dallas-based RIA firm DJH Capital Management and advisor training and coaching firm Jumpstart Coaching Lab. Most succession deals these days include so-called earnouts or retention provisions that tie some aspects of the purchase price to the carryover in the client base. That’s why notifying clients, introducing them to the successor and giving the successor responsibility for day-to-day interactions ahead of time are essential steps, he said.

“There are a lot of moving parts,” Henderson said. “The advisor being acquired needs to probably agree to an amount of time that they’re going to stay on for the transition, because the last thing the acquirer wants is to write a check and then the client accounts start disappearing.”

READ MORE: How financial advisors can buy a wealth book of business

Don’t fear client exits, just do things to lower the risk

For retiring advisors, including successors in meetings often proves easier than truly allowing them to manage longtime clients’ accounts, Caro said. While nothing needs to happen overnight, the transition must ultimately lead to a setup in which, “slowly but surely, some clients are completely fine with meeting with this associate alone,” she said. The retiring planner may wish to keep working with a very small group of no more than five longtime clients. But they’ll simply have to let go of the book at some point.

“There’s a small risk that not every client is going to stay,” Caro said. “So long as you do a good job with transitioning them, it’s still more attractive for them to stay. They would have to be really angry to just go out and find another person and do the paperwork and transition to another stranger. So I think the risk is fairly low if you do it right.”

An advisor’s unexpected death or disability could cause a much larger difficulty with retention, and the infamous custodial repapering process of accounts involved with changing that vendor could boost client exits in a transition to around 15%, Doherty said. In most cases, the expected attrition amounts to less than 5% of the assets under management in an effectively crafted succession plan, with the number at zero in “a lot of cases,” he said.   

“The risk of client attrition in a transition is a larger concern than the reality of the results are,” Doherty said. “It tends to be of significant concern, but the actual results are pretty mild.”