RIA Transitions: What Gets in the Way

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We pretend that transitions are just financial transactions when, in fact, they are a highly emotional event for RIAs. The reality of any transition deal is that advisers must give up control as well as equity to transition successfully, thereby gaining freedom, peace of mind and time for the things that matter most to them. This is easier said than done.

Whether it’s a merger, a sale or an internal succession, transitions reveal a subconscious labyrinth between an RIA’s head and heart. Approximately 80 percent of RIAs say they want a succession plan, yet only 20 percent execute one successfully. A recent Schwab comment notes that in order to become part of that 20 percent, you need to be fully aware of the forces that will support you, or thwart you, starting today.

If you’re a fee‐based, independent adviser who’s been taking care of your clients’ portfolio management and financial planning activities for years, there’s now an entire industry of consultants, seminars and services vying for the opportunity to assist with your transition plan. Their guidance is overwhelmingly focused on the deal structure and the numbers. While finance is our comfort zone, let’s be candid: the basic math is mental cotton candy that can be worked out in a few minutes on a cocktail napkin. But if the math is so easy, why are there so few “successful” transitions?

RIAs don’t sell their firms for three reasons that are, for the most part, entirely subconscious:

  1. You don’t have financial freedom
  2. You can’t sell your kids to the devil
  3. You resist losing control

Any one of these things can blow up or ambush a deal, effectively delaying your ability to move on to your next chapter. Advisers frequently spend months dancing around the truth of these issues only to walk away at the eleventh hour. Alternatively, their discomfort may emerge months later, and they’ll unwind the entire transaction.

Transitions with positive outcomes are entirely possible. Becoming part of the 20 percent will require you to call subconscious beliefs out into the open before they undermine you, then handle them with skill, empathy and respect.

Reason No. 1: You Don’t Have Financial Freedom

Despite our training as financial professionals, many of us struggle with acknowledging the truth about our own financial freedom. Generally, if you are a state-registered advisory firm, the net proceeds after tax won’t give you financial freedom unless you’ve already built a big, fat nest egg. If you’re a federally registered firm, your net after tax may be large enough to give you financial freedom, but the rate of return on your liquid assets is probably well below the money that your firm was paying you both directly and indirectly. In other words, a transition is a far cry from the massive payday everyone imagines.

It’s tough for advisers who find themselves in this position since they must replace the relatively comfortable incomes they previously drew from their businesses. They have to keep working to achieve their financial goals, usually by joining the buyer’s firm. Many advisers react to this realization by retreating from any serious discussion of transition altogether. They go into hiding, both intellectually and emotionally, until circumstances beyond their control force them into action.

However, joining the acquiring team can be positive as well as profitable, especially if the cultural fit is strong. When a longtime adviser with a smaller practice joined our team, our dialogue was as much about the similarity of our “work hard, play hard” cultures as it was about the financial gain he would enjoy by continuing to work as an adviser with us. We both have observed that the additional revenue he generates is creating great value for our clients, for him and for the firm.

Reason No. 2: You Can’t Sell Your Kids to the Devil

For many RIAs the transition of their clients is a defining moment. It’s highly personal and eclipses the value of the portfolios. They see themselves as trusted, hands‐on managers who are concerned with details and decision‐making; something they’re able to do with the support of loyal staffers who are wired to care about their clients the exact same way.

These advisers are very protective of their client relationships and skeptical that anyone else can take care of those relationships as well as they can. Some openly question whether bigger is better, thinking that it means a loss of the personal touch they delivered so effectively. They may view their potential suitors with mixed feelings, or even a negative bias that casts an acquiring firm in an oppositional role.

Of course, not all transition partners are the devil, and clients are quite capable of moving on to new advisory firms. But we’re talking about the subconscious mind where perception is frequently mistaken for reality. These advisers are in a mental trap. They can’t move on because they believe they’re selling their clients out. Yet not going forward keeps them on a treadmill with no transition plan and no positive outcome in sight.

Transitions only work for these RIAs once they’re confident that their clients will be well taken care of and happy. This requires sincere effort to establish a shared set of values with the new firm. A veteran adviser who merged her practice with ours was a fine example of this. Integrating her practice was much like getting engaged and married, then learning how to live together. We laugh about it now, but it took commitment on both our parts to understand each other and be honest in our communication. That meant a tremendous amount of talking about financial as well as non‐financial issues. The outcome has been well worth it for our clients, for her and for the firm.

Reason No. 3: You Resist Losing Control

Of the three, this one is the most subconscious and complex. RIAs say they want to sell or transition. They want to move on to their next chapter, whatever that looks like for them. But it’s rarely that simple.

Independent, fee‐based, registered investment advisers are a special breed. They spend years building their firms and taking extraordinary care of their clients’ wealth. As self‐made individuals, they’re used to being masters of their own universes. They are brilliant at what they do and will sometimes partner up in business if they find the right match of skills sets. Call them mavericks, or specialty acts, or whatever you wish. It’s often a challenge for them to release their old identities and join a new team, especially one that might ask them to embrace different ways of operating.

To transition successfully, advisers must give up control and equity in order to gain freedom, peace of mind and time for the things and people they love most. This is especially true for RIAs who have enjoyed their advisory careers and simply haven’t given much thought to what they’ll do the day after the deal is done.

Consciously designing that next phase is the key to being happy with the entire process. When you’re conscious, it allows you to be confident in your decision-making process. When you’re not, the subconscious issues that are lurking in the background will complicate your plans.

The co‐founders of my firm (who also happen to be my father and older brother) both embraced the idea of an internal transition, and it occurred very intentionally. They ceded decision-making over time while doing what they each enjoyed; for my dad it was stock research and client relations, whereas for my brother it was pursuing a new career. Not all family successions occur so smoothly. This one worked because our values were aligned, and we shared a vision for the business that allowed them to give up control and experience freedom. This ensured the best possible outcome for our clients, for them and for our firm.

What Do the 3 Reasons Mean for You?

Transition is a deeply emotional process, not simply a financial one. If you want to move past the subconscious barriers that can undermine yours, then let your rational mind stay busy with the trade journals, while the rest of you considers the truth of why you’re not moving forward with a deal.

I urge advisers to listen to their hearts as well as their heads in order to do what’s best for both their clients and themselves. Doing so will effectively disarm the three reasons I’ve identified and create a new level of mastery for advisers who are ready to embrace their next chapter.

Ryan Kelly

Ryan Kelly is CEO of Spectrum Asset Management, Inc., an RIA in Newport Beach, California, that is a second-generation family firm. Since 2012, Kelly has successfully led Spectrum’s acquisition of three right-fit independent advisory firms and continues to look for similar opportunities.

 

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