Report: RIAs Face Succession ‘Crisis’

Facing pressure from an impending fiduciary rule change, older registered investment advisors (RIA) considering a market exit better get a legitimate succession plan in place.

As it stands, overall poor succession planning means advisors often undervalue businesses that they’ve spent their whole lives building, said one expert who follows the RIA market.

Now is the time to change that, said Chip Roame, managing partner with Tiburon Advisors in Tiburon Calif., as mergers and acquisitions among RIAs are expected to speed up in the next five years.

Is the advisory properly valued, and on what terms? Have the parties to the transaction established accurate multiples? Where do the earn outs fit? Are the partners better off taking cash or settling for stock?

When it comes to these questions, RIAs are “way behind the game here,” compared with CPA firms and insurance agencies that close hundreds of deals every year, Roame said.

“True succession plans are maybe held by 10, 20, 30 percent of advisors, so that’s a crisis,” Roame said in a Web-based research briefing to clients last week.

“When you think about advisors and the whole fiduciary standard argument that's going on, clearly having a succession plan has to be a fiduciary responsibility of advisors,” he added. “So this number (30 percent) has to go up if advisors are doing their job.”

Succession planning isn’t exactly new. It’s been on the radar screens of advisors for more than 15 years, if not longer.

But the Department of Labor’s fiduciary rule and the retirement of many baby boomer advisors, as well as some clients, means advisors are caught in a maelstrom of contradictory forces.

On the one hand, RIAs are underprepared to sell or pass on their companies to a potential buyer, but demographic forces and tougher regulatory requirements mean more advisors are finding themselves under pressure to leave the business.

“If the fiduciary standard is approved, I have to believe that succession plans get mandated at some point by the trade groups, so I think succession planning will get a lot more attention,” Roame said in a webinar titled “Financial Advisor Succession Planning & Acquisitions: Succession Planning and the Growing Acquisition Market.”

The fiduciary standard is “going to shine a light on this, so I think you'll see a lot more financial advisor transactions going forward,” he said.

Custodians and independent broker-dealers (IBDs) will also treat these opposing trends playing out in the RIA market as either an opportunity or a crisis.

Schwab, Fidelity and TD Ameritrade, or platforms like LPL and Cetera, look at the landscape and say to themselves, “My advisors are getting older, they are going to do something with their business, I want to help facilitate that to another advisor under my umbrella so I retain the assets,” Roame said.

Inattentive custodians and IBDs risk seeing their advisors and the assets those advisors manage “picked off,” as assets flee to competitors.

The largest acquirers are other fee-based financial advisors or aggregators like HighTower and United Capital Financial Partners. Retail banks, which used to have a voracious appetite for advisories, appear to have backed off, Roame said.

Tiburon’s research found that only 33 percent of financial advisors have succession plans and 67 percent do not.

There were a reported 54 fee-based financial advisor mergers and acquisitions in 2014, a drop from a peak of 70 transactions in 2010, according to Tiburon’s research.

Actual numbers, however, are likely to be far higher as mergers take place among partners and from partners to employees, Roame said.

Assets under management (AUM) acquired in the process of merging and acquiring fee-based financial advisors came to $47.4 billion in 2015, an increase from the $43.7 billion reported in 2013.

That brings the cumulative AUM acquired in mergers and acquisitions of fee-based advisors to $511.3 billion in 2014 — or about 20 percent of the entire AUM of the RIA market.

In other words, about 20 percent of all assets in the RIA market have turned over — with some turning over more than once, and that is an important trend worth watching, Roame said.

In 2006, only $32.8 billion in cumulative AUM were acquired by fee-based financial advisors in mergers and acquisitions.

While AUM volumes that trade hands are often dependent on the size of individual advisory shops, there’s no question that the number of financial advisor-related mergers of all kinds are on the rise.

There were an estimated 195 (fee and commission-based) financial advisor-related mergers in 2015, an increase from 186 transactions in 2014.

This year, the number of financial advisor-related deals is expected to rise to 250 transactions and by 2019, the number of deals is forecast to reach as many as 500 transactions.

“We can go back and find media quotes from theoretical experts in these industries that 20 years ago said the mergers and acquisitions market was going to boom for financial advisors — 20 years ago,” Roame said.

“I would tell you, I now believe that. I didn't believe it back then,” he added.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].