“Looming Succession Crisis”
Succession planning is a crucial aspect of the financial advisory business. The need for planning also ties into the broader transformation and innovation within the financial services industry, which is ever adapting to new technologies, changing client expectations, and evolving regulatory landscapes.
A financial advisor’s average age is 57 and rising, according to a recent J.D. Power survey. The Certified Financial Planner Board of Standards Inc. reports that there are more advisors over 70 than under 30. That disparity could lead to significant growth and succession problems for the wealth management industry.
For organizations seeking M&A as a growth strategy, age diversity should be considered not only to provide historical knowledge and wealth management experience, but also to lay the groundwork for succession planning.
Most founders want to sell internally. They typically like to have their firm operated by people they have employed or mentored. Selling internally is seen as a positive for the industry as those advisors presumably already know the firm’s inner workings.
Advisors early in their careers are a great demographic for acquiring firms, but they are becoming increasingly scarce. One reason: affordability challenges.
A majority of registered investment advisor leaders believe their next-generation talent cannot afford to buy them out, according to a new report by DeVoe & Co.
The executives were asked one question: Is your RIA’s NextGen able to buy out the founders? There were just three response choices. In each case, the percentages continued to move down.
Only 18% of RIA executives believe the next crop of advisors has enough money to take over the business, according to DeVoe’s 2023 annual RIA M&A outlook, which surveyed 102 senior executives, partners, and owners from RIAs ranging in size from $100 million to over $10 billion in assets.
David DeVoe, founder of the San Francisco-based investment bank and RIA consultant, offered a strong warning: “These sobering statistics outline a clear trend: The NextGen Affordability Index has sunk into a concerning zone, the looming succession crisis that many have feared for decades may very well be upon us.”
In contrast to the reduction to 18% from 38% of participants indicating their NextGen could afford to buy the practice, there was a significant increase to 45% from 30% of respondents saying NextGen advisors could not afford it. Meanwhile, 37% are unsure, compared with 32% in 2022.
The report revealed that three variables have aggravated the succession crisis: soaring RIA valuations, which have risen steadily since 2008; rising lending rates, which have increased acquisition prices; and founders’ failure to plan for the next generation taking over.
In the context of valuation, 35% of respondents projected them to fall this year. Approximately 49% said they expected valuations to remain steady.
“Unfortunately, more and more, the value of RIAs exceeds the buying power of their staff,” Devoe wrote. “This affordability gap has accelerated dramatically in the last several years.”
Given these challenges, most advisors stated they are turning to outside the company when considering selling their business, which, based on the results, may work to their benefit. Over 65% of respondents anticipate acquiring a firm within the next two years, which is the largest number in four years.
Potential sellers cited liquidity as their major reason for considering an outside sale. In fact, 57% of sellers claimed liquidity was a major driver behind the sale of their business, up only 44% in 2022. Along with liquidity, succession as an impetus increased dramatically, rising to 45% last year from 38% in 2022.
Even though growth dropped from the top reason to sell a business in 2022, it ranked second last year, with 49% of sellers identifying its importance.
“Given the downward shift in the NextGen Affordability Index, it is no surprise that liquidity and succession are surging. Advisors who realize they can’t sell internally are shifting to plan B: an external sale. It is reasonable to extrapolate that these dynamics will drive an overall increase in M&A during the next five to seven years,” Devoe noted.
