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Cloud Technology Blog for RIAs and Broker-Dealers

Upgrade Your Practice for Optimal Succession Planning

8/25/16 1:27 PM / by Robin Brown

Focus Financial’s Anita Venkiteswaran says regulatory changes might prompt greater urgency.


On September 19, Anita Venkiteswaran of Focus Financial Partners will speak at External IT’s inaugural Wealth Management Technology & Cybersecurity Summit in New York. This event gathers industry leaders and influencers for a day of collaboration and networking on the most crucial matters impacting their businesses.  This blog is the first in the series of profiles of speakers for the upcoming summit.

Odds are high that you have not given much thought to your firm’s succession plan, but it would be better for your business if you did.

In June, the SEC proposed making such considerations mandatory for RIAs. If that proposal becomes a regulatory requirement, you may have significant catching up to do. But succession planning is not just a chore. It’s a process by which RIA owners can evaluate the current state of their business, determine a reasonable valuation for it and pursue upgrades to enhance that valuation.

“We have seen a lot more awareness from firms in knowing they should plan for it, but that doesn't mean the firms are acting on it,” says Anita Venkiteswaran of Focus Financial Partners, a partnership of entrepreneurial, independent wealth management firms that helps advisors grow their RIAs while facilitating succession and continuity planning. The Focus Successions® program has been created to help RIAs put in place a “living will” for their businesses. “I put awareness as a first step. A couple of years ago, firms were not even aware.”

Protecting Clients

There’s something of an irony present, since many advisors tell their business-owner clients to establish their own succession plans sooner rather than later. Yet RIA owners often so enjoy working for themselves and reaping healthy profit margins that they can’t bring themselves to envision an exit. Yet that’s precisely what the SEC wants, since the regulator views succession planning from the client’s perspective. Specifically, what happens to client assets if their advisor shuts down abruptly.

At Focus Financial, advisory clients are indeed an important audience to consider. So are the firm’s employees and the RIA owner’s family. Each group of stakeholders may be materially affected by how an RIA owner exits the business. Of course, the RIA owner stands to feel the brunt of any such exit. And as with any major financial step, the best outcomes tend to stem from careful preparation over a sufficient amount of time.

These statistics, from a recent study by Focus Financial and JPMorgan Chase, help illuminate the circumstances of the average RIA: 26% of clients were ready for retirement in the 60-69 age range, 27% of advisors planned to retire in the next 5-10 years, and 32% of wealth management firms had not conducted a valuation of the business.

Making Improvements

Unless the firm is already in perfect shape – which is rare – there’s usually some improvement to be made. Upgrading an RIA enough to maximize its valuation often takes well over a year, Venkiteswaran says. Relevant upgrades can include hiring, training or promoting key personnel; adjusting the service model to retain the most desirable clients and attract similar prospects; as well as acquiring new technology that boosts efficiency or profitability.

“There is no one technology product out there that automatically boosts a firm’s valuation. The business model determines the appropriate systems and processes required,” Venkiteswaran warns. As such, Focus Financial does not dictate what kinds of software the RIAs it serves must use. Instead, it acts as a consultant.

However, higher performing firms, especially those with younger managers, have explored adopting cloud platforms that specialize in CRM, digital document management and cybersecurity measures. Tools that facilitate automation and mobile working are also popular. “We do give valuable input on our firm’s operations and technology infrastructure, especially in terms of its suitability to help it grow or transition down the line,” she says.

Conducting Assessments

Valuation is among the most contentious aspects of any succession plan. Anyone looking to purchase the business is bound to conduct their own valuation assessment, and that figure may be vastly different than the owner’s assessment. Focus Financial recommends that RIA owners use Earnings Before Partners Compensation as the guiding metric – not revenue multiples. The logic is simple. Whereas revenue can be high without resulting in high profits, EBPC is much more reliable in terms of looking at the free cash flow the business actually generates for its owners.

Even so, many more factors go into a proper valuation: Growth trends regarding profits and client base; the average client age, stickiness and length of relationship with the firm; the size of the employee base and their level of job satisfaction; client and employee comfort with new potential owners; and, whether the firm’s technology infrastructure is up-to-date, well integrated, and devoid of legacy systems that lack a clear purpose.

“This is a people business, and most people have the majority of their net worth tied up in the equity of their business,” Venkiteswaran says. “Succession planning is not only for smaller firms, it’s extremely important for all firms.”

To learn more about succession planning and Focus Financial, register here to attend the Summit.


Topics: Financial Services, Cybersecurity, Technology

Robin Brown

Written by Robin Brown

Robin Brown is VP of Marketing for External IT. Her expertise includes brand strategy and execution, marketing strategy and execution, product and services positioning and marketing, field marketing and demand generation, on-line and social media, public relations, corporate and internal communications.