Starting a solo RIA firm is an exciting venture. Like Cerulli REPORTSRIAs will control nearly one-third of advised assets by 2027. However, business owners must think ahead and take additional steps to ensure they are maintaining their firm's profitability and growth rate, which which will make it more attractive to sell.
today, one third of business owners don't prioritize succession plans, setting a dangerous precedent for an aging group. Like the vast majority of Solo RIAs are approaching retirement age and firms continue to consolidate, it is important that advisors understand how to navigate the succession planning process to achieve the best possible outcome.
Clearly, creating a plan that sets the business up for success for generations to come requires critical thinking and the right partners. While there are more opportunities than ever to sell, ranging from M&A THE private equity moneysole proprietorship RIA firms need time and deep reflection to reach the right decision that will support them in retirement.
Solo Operators face Unique Challenges
There is a dual problem emerging in our profession: solo-RIA owners are approaching retirement age and hitting their growth capacity about a decade before retirement.
It's no secret that the age of the profession continues to grow—by leaps and bounds a third of the profession will retire in the next decade. Indeed, over the next 10 years, over 100,000 advisors plan to retire, representing 37.5% of industry professionals managing 41.5% of total assets. While most advisors expect to retire between the ages of 60 and 75, sole proprietorship RIAs often put off longer and get stuck around age 50. This is likely because industry comparison suggests that most advisors reach their client capacity between 30-40, or $220,000-$320,000 in income.
There is a risk of stagnation: during this time, the firm's profitability begins to increase, making it ill-positioned to sell.
A FP Transition REPORT analyzing more than 5,000 evaluations over five years suggests an advantage in shared leadership, citing: “Sole-owner firms increased their net new clients by 9%—a solid growth rate. But multi-owner firms? They saw an amazing 20.2% increase in net new customers! This is more than double the rate.”
Joining before retirement can be a fruitful and fulfilling solution.
Succession planning does not happen overnight
Regardless of whether you plan to bring a partner, one thing is clear: it's never too early to start gathering the elements necessary for successful succession planning.
You'll probably find the approach familiar, as succession planning can be as simple as recreating the retirement planning process that clients go through every day.
Studies suggest that owners likely need to at least four years to create a plan and find the right successor. While most RIA owners prefer to sell or transition their business internally, 34% are now considering an external sale or are unsure of their succession plan (30%).
To better determine the right path, consider these non-negotiables. Is maintaining company culture more important than appreciation? Do you want to ride off into the sunset or stick around for a few more years in an advisory capacity?
The most common options today include selling the business to a family member, merging with another practice, or outsourcing to a larger wealth management firm. Doing your due diligence beforehand will likely highlight the most viable options and ensure that your financial and legal records are in good shape.
It's time to lean on partners
Making teams is difficult, one prominent reason why 47% of advisers continue to work as sole practitioners. However, you will need external and reliable resources as you approach the end of your career. RIA leaders who have spent decades building and growing their practice will need to plan years ahead for the successful continuation of their business.
It is the duty of solo operators to rely on partners of their choice. Your broker can likely help connect you with firms looking to buy or firms that can provide a valuation.
It will also be useful for you to assess whether you need to streamline any partnerships or services to ensure the business is more attractive to buyers. Striking a balance between technological advancements and personalized touches will support continued growth while supporting operations. Customers still need to have a seamless experience, even as continuity plans are transforming the business from within.
It's time to take your advice
Financial advisors cultivate some of the most trusted and lasting relationships in their clients' lives and are always looking out for their long-term goals. Sometimes, they also need to turn inward to ensure that they have given the same care and attention to themselves.
Long before retirement hits, lean on your trusted partners to have honest conversations about what's most important to you before you retire. Retirement is an exciting prospect: you need to give yourself time to evolve in the final phase of your career to ensure it is the most powerful and transformative period of your working life.
By taking action to ensure that you maintain your firm's profitability and growth rate before it's time to sell, and that the valuation is based on sound, not inflated, information, you can approach the remaining years of work with ease and confidence.
Mike Watson is the head of RIA detention in Axos Advisor Services