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Published on www.thedailyupside.com on March 23, 2025 | Authored by Jeff Benjamin
The Real Problem Behind Succession Planning
The realities of an aging advisor demographic — combined with intense interest in RIA businesses from buyers — are changing the game.
Jeff Benjamin, Guest Contributor to The Daily Upside
Financial advisory firms set another record for M&A last year — and that’s showing no signs of slowing down. What is changing is the primary driver behind the monster deal activity.
Scale has been driving mergers and acquisitions among registered investment advisory firms for the better part of a decade, including a record 269 deals last year, according to the latest research from the investment banking and consulting firm DeVoe & Co. However, the realities of an aging RIA demographic point toward an increased focus on succession planning, which is now expected to emerge as the leading driver of deals moving forward. It’s a shift that could change the nature of deals in the years to come.
“The tide is about to turn as far as the key driver for folks selling RIA firms,” said Chief Executive Officer David DeVoe.
Where’s the Exit?
There are multiple factors driving the activity in RIA space, which included a record 78 deals in the fourth quarter of 2024 alone. But DeVoe is zeroing in on the “eroding ability” of next generation advisors to buy out aging RIA firm owners as the next rocket booster behind deal activity.
“For a long time, the appetite for growth and scale has been the number one driver of M&A activity, and succession planning has been a strong number two,” DeVoe said. Now, “succession is quickly becoming the number one driver,” he said, adding that less than one-fifth of advisors believe their generation-two and generation-three advisors can afford to buy them out.
The problem is that junior employees are being priced out of the market as valuations continue climbing, according to DeVoe’s research. The recent strength of the financial markets, combined with a growing appetite for financial advice, is working against the efforts of many internal succession plans. Some 40% of next-generation advisors were in a position to acquire ownership stakes in advisory firms where they worked as recently as four years ago, according to the data. That percentage has since been cut in half.
Who’s the Boss?
Chuck Failla, owner of Sovereign Financial Group, said he is still at least 15 years from full retirement, but is already “early on in the process” of finding a successor from within his firm. He’s simply not interested in leaving the business via a sale to private equity investors that could radically alter the advisory firm he has built, while also turning him into an employee as he transitions toward retirement.
“If you’re at a point where private equity thinks your firm is attractive, after 30 years of not having a boss, you now have a boss,” he said. “I have no interest in that and I don’t care how much they promise autonomy and independence, because if someone writes you an eight-figure check, you have a boss.”
Like a lot of advisors that have built their firms from scratch, Failla isn’t interested in just selling and walking away, but he does want his successor to eventually rid him of many of the daily responsibilities of running a business and managing people. “If I can never again be in a meeting talking about why a (software interface) connection is not working, I will be a happy guy,” he said. “At some point, I don’t want to run the business day to day.”
Failla plans to sell the business to younger employees who can put up 20% for an ownership stake through a non-recourse loan that gradually buys him out. Also, unique to Failla’s strategy is that he is opening the sale to anyone working at the firm, not just the financial advisors. Expanding beyond the financial advisors and other professionals within the firm might be a key element to success.
Let’s Make a Deal
One of the things all advisors seem to agree on when it comes to a merger or sale is that it is not all about a firm’s assets under management.
“Whether you’re looking for a full exit, partial liquidity, or a strategic partnership, clarity on your long-term objectives will help guide negotiations and ensure alignment with the right buyer or partner,” said Daniel Milks, founder of Fiduciary Organization & Woodmark Advisors. “A deal might look good on paper, but the culture of the acquiring or merging firm matters just as much,” he added. Differences in investment philosophy, client service models, and firm values can all lead to significant friction once the ink dries.
With that in mind, Jacqueline Martinez, managing partner at Alaris Acquisitions, said it is never too early to start your due diligence. She recommends exploring your options two or three years before you think you’re ready to sign the paperwork. “To position your business as attractive to potential buyers, understand what makes it appealing,” she said.
Martinez recommends consistent three years of net new asset growth above 3%, having next generation advisors on board, at least three years left in your glide path and a diversified client base. “Keep egos in check throughout the process and share any red flags about your business up front, rather than letting the buyer discover them later,” she added. “And when evaluating potential buyers, don’t let the initial valuation drive your decision; it can be a misleading indicator of a good fit.”
Instead of giving too much weight to the initial valuation, Martinez advises defining the “best deal as the one that balances cultural fit, initial valuation, post-acquisition quality of life and growth incentives.”
Step Onto the Scale. Carlie Ransom, co-founder of Equal Path Investments, is also weighing her options in terms of a merger, despite launching her advisory firm only a year ago. Ransom has been in the wealth management industry for a decade, but since starting her own firm she has joined a Mastermind group of other advisors through the XY Planning Network that has introduced her to the potential benefits of consolidation.
“Considering how much we’re each spending on compliance and other things, some of us are questioning whether it would make sense to merge our firms to create some economies of scale,” she said. “My other reason for wanting to merge is for a succession plan because my partner is not a financial planner.”
Easy as 1, 2, 3. Describing the sale of an advisory firm as potentially “one of the most important decisions of your life,” DeVoe said firm owners should think strategically and get a team in place that includes lawyers, tax experts and bankers. But even as big and potentially overwhelming as a sale might seem, it can be broken down to three basic stages. The first stage is about developing a plan to tell a story and determine the kinds of partners that would be a good fit.
“You can fatigue yourself by chasing so many buyers that are not a good fit,” he said. The second stage involves the outreach to potential buyers with a “methodical and targeted approach,” Devoe said. And the final stage is where the negotiations begin once the list of potential buyers is down to a handful of firms.
“This is where you’re seeking the best deal to make sure it’s good for all parties,” he said.
https://www.thedailyupside.com/advisor/practice-management/the-real-problem-behind-succession-planning/
