By 360 Financial, Big Picture Planning and Wealth Management
As a Registered Investment Advisor (RIA), your clients depend on you—a lot.
They are counting on you for customized financial planning, investment management, and dedicated long-term guidance. If you don’t have a clear RIA succession plan in place, your firm's future and your client's financial well-being may be at risk.
Get started with your RIA succession planning today to mitigate the risk of a rushed takeover and keep your RIA firm in tip-top shape for the next generation.
Why You Should Start Financial Advisor Succession Planning Sooner Rather than Later
Succession planning is critical work to ensure the long-term stability and leadership continuity of your firm.
Assuming you have ample time before retirement could lead to unfortunate blunders.
Starting early, on the other hand, allows for a smoother transition for both your clients and employees and can help your RIA owners maintain operations.
The earlier you begin planning, the more control you have over selecting a successor and the internal transition when nearing retirement age.
Key Steps to Creating a Strong RIA Succession Plan
1. Assess Your Advisory Firm’s Current State
Before committing to a succession plan, it’s a good idea to evaluate the current state of your advisory firm.
This includes reviewing client relationships, profitability, and operational efficiency. Strong client relationships support high retention rates, while profitability assessments provide insight into your firm's financial condition. Operational efficiency is another key factor.
Streamlined business operations could make the internal transition a lot smoother.
Use this assessment to see what internal issues need to be addressed before you can move forward with succession planning. This is especially important when working with an external buyer, as a thorough assessment will help you get fair market value for your RIA.
2. Define Your Succession Goals
Succession goals include preserving client satisfaction, maintaining company culture, maximizing the sale price, and seeking to ensure a smooth transition for employees.
Defining specific objectives can help you make strategic decisions and choose the right succession plan.
3. Define Your Retirement Goals
Next, consider your personal retirement goals.
A clear future vision will influence how you structure the transition. Aligning your succession planning with your retirement goals will increase your chances of achieving financial security for yourself and your firm.
4. Identify Your Successor
There are multiple ways to structure a succession plan.
Internal succession is when a current employee or partner takes over the firm, offering continuity and a familiar face for clients. On the other hand, many advisors choose to sell externally. If you don’t have an appropriate successor in house, this may be your only option.
Internal succession provides a sense of continuity and allows for a gradual leadership transition, whereas external buyers can provide immediate liquidity and operational efficiencies.
However, cultural fit and client retention should be carefully evaluated.
Another possibility is merging with another firm. Smaller firms often merge with larger ones to gain additional resources that support their growth before scaling back. A merger may allow for a smooth succession and greater income potential.
Researching these options can help you select the best succession option for your firm’s future.
Regardless of your choice, the successor needs to possess the necessary leadership skills, industry knowledge, and client management capabilities to handle the transition effectively.
In recent years, private equity firms and large RIA aggregators have become prominent buyers in the succession planning space. While these buyers can provide immediate liquidity and financial incentives, they often prioritize operational efficiencies and profitability over maintaining client relationships and firm culture.
For RIAs who value a seamless transition with minimal disruption to clients and employees, partnering with a dedicated succession planning team, like 360 Financial’s Succession Planning Team, offers a more personalized and strategic approach. Unlike private equity buyers, who may implement sweeping changes, 360 Financial has a client-focused approach.
5. Consult an M&A Professional
Mergers and acquisitions in the financial services industry can be complex and require professional guidance.
An M&A professional can help you research market trends, firm valuation, and succession planning deal structures. By leveraging their expertise, you can work to negotiate a deal that aligns with your personal financial and business goals and helps you best leverage your assets.
6. Conduct a Business Valuation
A business valuation helps establish a realistic sale price and provides clarity for buyers or successors.
Hiring a professional to analyze financial data, industry trends, and market conditions seeks to ensure an objective valuation.
Common valuation methods include:
AUM-Based Valuation – Based on assets under management; historically popular but less reflective of profitability.
Revenue-Based Valuation – Assesses annual earnings but does not factor in expenses.
EBITDA-Based Valuation – Evaluates earnings before interest, taxes, depreciation, and amortization, providing a clearer picture of profitability.
Cash Flow-Based Valuation – Focuses on actual cash generated by the firm, accounting for expenses and reinvestments.
Today, EBITDA and cash flow-based valuations are typically preferred. They more accurately reflect a firm’s profitability, sustainability, and growth potential. Choosing the right valuation method seeks to ensure sellers receive a fair price while making the firm attractive to buyers.
7. Structure the Deal and Transition Plan
Once the successor has been identified and the valuation completed, the next step is to structure the deal and transition plan.
Common deal structures include upfront payments, earn-outs, and equity retention—each with different financial implications. We’d also suggest outlining a transition period that allows for a smooth handover.
In addition, how you structure the sale of your RIA firm can significantly impact your tax liability, financial security, and risk exposure.
The three most common deal structures include:
Upfront Payments: The seller receives a lump sum at closing, providing immediate liquidity but potentially resulting in higher tax obligations.
Earn-Outs: A portion of the sale price is tied to future performance benchmarks, reducing buyer risk but delaying full compensation for the seller.
Equity Retention: The seller retains partial ownership, maintaining involvement while benefiting from the firm’s continued growth.
Each structure has different implications on capital gains taxes, long-term financial security, and operational involvement post-sale. Working with financial and legal advisors can help optimize the deal to align with your retirement and financial goals.
8. Communicate with Clients and Employees
Clients will need reassurance that their investments are safe, and employees will need to understand how the transition will impact them.
Carefully address employee concerns and use client retention strategies to help maintain stability within the firm.
When you work with an advisory firm that has experience handling M&A transitions, they will guide the process. They’ll have inside knowledge of how to maximize client retention and create a smooth and easy transition for everyone.
9. Make It Legal
Consult with legal and financial advisors throughout the process to uphold all legal agreements and check off regulatory requirements.
Take the necessary legal steps to reduce risks and safeguard your firm, employees, and clients.
10. Execute and Monitor the Transition
The management transition will require ongoing monitoring.
Flexibility and adaptability are key to upholding your firm’s service standards. Monitor client retention rates, business performance, and successor integration to track the success of the transition process.
Regulatory Compliance Considerations
For RIAs, succession planning is not just a business decision—it’s a regulatory requirement. If your firm manages over $100 million in AUM, it must comply with SEC regulations, including updating your Form ADV and ensuring all ownership changes are properly disclosed. State-registered RIAs also have specific regulatory obligations that vary by jurisdiction.
Other compliance steps include:
Client Communication Requirements: Ensuring clients are informed well in advance of ownership changes.
Regulatory Filings: Updating SEC or state registration documents and filing necessary amendments.
Fiduciary Duty Compliance: Ensuring the successor meets the same fiduciary standards and qualifications.
Failing to address these regulatory requirements can lead to compliance violations, client attrition, and potential legal challenges.
Working with an advisory firm that has experience with M&A transactions means you won’t have to worry about all the details. At 360 Financial our in-house team works with LPL Financial’s transition team to work to ensure everything goes smoothly.
11. Mitigate Post-Transition Risks
Even with a well-structured succession plan, risks remain after the transition.
Common challenges include client attrition, cultural misalignment, and operational disruptions. To mitigate these risks, consider:
Phased Transitions: A gradual handover allows clients and employees to adapt to new leadership over time.
Retention Agreements: Structuring retention agreements for key advisors and staff can help maintain client relationships and operational stability.
Integration Timelines: Setting clear milestones for leadership handoff, process adjustments, and performance evaluations.
By actively monitoring these elements, RIA principals can help ensure a successful transition while maintaining the integrity and profitability of their firm.
Final Thoughts
Succession planning is one of the most critical decisions an RIA can make.
It impacts the future of the firm and the financial well-being of clients and employees. A well-structured plan can take the stress out of retirement. It will aim to ensure continuity, preserve the firm’s legacy, and provide financial confidence for all stakeholders.
By starting early and evaluating all available options, RIA owners can navigate the transition with far greater confidence. Whether passing the firm to an internal successor or exploring external opportunities, thoughtful planning leads to a smoother, more successful transition.
Taking proactive steps today is key if you want to secure long-term success for your business and clients.
Other Articles and Guides on Succession
About 360 Financial
360 Financial is an independent wealth management firm with a team of specialized financial advisors and financial planners. As fiduciaries, 360 Financial’s advisors provide services to business owners, entrepreneurs, and professionals. We help investors with sudden wealth, retirement planning, tax planning, estate planning, and business financial planning.
Headquartered in Minnesota, we serve investors across the US with online and in-person wealth management and financial planning services.
