BALTIMORE – Many RIA owners look to their employees to take over the business when they retire. Yet some advisers are overlooking critical aspects of what an internal succession plan actually entails.

Roughly 30% of planners do not have a succession plan in place, David DeVoe, managing partner at DeVoe & Co., said at the FPA’s annual conference. He mentioned that the SEC is currently looking into forcing RIAs to come up with a plan of succession.

David DeVoe, managing partner, DeVoe & Company

DeVoe said that even if the SEC does not make succession planning mandatory for RIAs, clients might be wondering, “What happens to me if something happens to you?”

With the growing need, as well as possible new SEC rules, many RIA owners are turning to those who work for them to take the reins when they retire or are unable to work.

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While this can be a beneficial solution in some cases, DeVoe points out that many RIA owners might be overlooking some important aspects of selling their firm to an employee.

A key misstep is that many owners want to hire a younger version of themselves, DeVoe said.
“Your successor is not you 20 or 30 years ago,” he said. “That’s not the person you need.”

DeVoe explained that firms were created by entrepreneurs willing to “eat ramen” and make sacrifices to create a business. However, most firms that have gained enough success to be sold to an employee don’t need an entrepreneurial leader. The firm likely needs a manager willing to adopt the culture and continue the growth of the business, he said.

The employee that takes over should fit a specific type of mold that will enable the business to grow and benefit the entire firm, DeVoe told RIA owners.

“You’re going to have confidence that this person is going to be able to run the business,” he said. “Leadership is quite different than management.”

Another common mistake, DeVoe said, is that young advisers simply cannot afford to buy a successful financial planning firm. He said firms that manage $400 million or more will likely not be able to be purchased by an employee.

“There is this disconcert that a lot of us have in terms of what the firm is worth and what our employees can afford,” he said. “Sometimes, it becomes impossible to sell a firm internally.”

Andrew Pavia

Andrew Pavia

Andrew Pavia is the Assistant Managing Editor for Financial Planning, Bank Investment Consultant and On Wall Street.