PLANADVISER - March/April 2019 - 14

trendspotting
Succession
Planning
Comes to
The Fore
Mergers and acquisitions
drive the trend
ACCORDING to Pierre Caramazza,
head of the private wealth division
at Franklin Templeton Investments,
developing a succession plan is " one
of the most important activities registered
investment advisers [RIAs] can
undertake. "
Like other RIA industry analysts
and executives, Caramazza recommends
that independent advisers who
have not recently considered the topic
of ownership transitions and succession
planning do so now. To help guide
advisers through the process, he just
published his extensive research on
the subject, the report aptly titled
" Keys for Successful Succession Planning
for RIAs. "
" A significant number of RIA firms
are contemplating a change in ownership
over the next five years, with
most anticipating an eventual acquisition,
merger or buyout, " Caramazza
says. " It's never been more of a seller's
market, with informed estimates
putting the ratio of buyers to sellers at
around 50 to one. "
Nonetheless, Caramazza notes,
buyers will still play a " dominant role "
in transactions when sellers come
to the table unprepared. Sellers who
have neglected to make real progress
on preparing their firm for sale may be
challenged when it comes to receiving
the full valuation on an otherwise
attractive business.
Echoing the findings of other analyses,
Caramazza's white paper says the
seller's market is likely to continue for
some time, and potential buyers are
being selective.
" They emphasize total AUM [assets
under management], revenue and profitability,
as well as compatibility in firm
cultures, " Caramazza says. " In fact,
organizational culture is a primary
decision criterion when transactions
are under consideration. Finding a
cultural disconnect at the 11th hour
has become a deal-breaker in more
than one major transaction. "
Even as some deals are inevitably
derailed, experts agree merger and
acquisition (M&A) activity in the advisory
and brokerage industry is likely
to increase dramatically over the next
five to seven years. For RIAs who want
to take advantage of this trend, succession
planning will play an important
role in securing the best terms in any
transaction, Caramazza says.
" Developing a succession plan is a
time-consuming and ongoing process, "
he advises. " RIAs who want to guarantee
the future of their firm, the best
interests of their clients and the wellbeing
of their employees should make
succession planning a priority. "
Less than one in three financial
advisers has a formal succession plan
in place today, according to another
recent report, " The Succession Challenge, "
issued by the Financial Planning
Association (FPA) and Janus Henderson
Investors. Overall, 41% have some sort
of succession plan. For those within
five years of retirement, 40% have a
formal plan, but for those within five
through nine years of retirement, the
figure drops to 34%.
Advisers in larger practices are
more apt to have a formal plan, with
60% of those in firms with $500 million
or more in assets under administration
(AUA) having one. Among firms with
less than $50 million in AUA, a mere
13% have one.
Among advisers with formal plans,
succession strategies tend to focus far
more on setting goals for maximizing
the value of the business than setting
out in detail how a transition of the
business will actually take place. In
fact, 72% of respondents said their
plan includes a goal for the value of
the business, while 61% have a plan
that includes discussion of the client
transition process, 57% have a plan
that includes the workload transition
process, and 56% have a plan
that includes the time frame for the
transfer process. -John Manganaro
14 | planadviser.com March-April 2019 Art by Andrea D'Aquino
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PLANADVISER - March/April 2019

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