Selling a practice to the highest bidder can be an expensive and ill-advised decision.

Sellers of RIA practices typically receive a down payment for their practices and then get back-end earnouts over the next three to five years as they deliver assets and/or gross production. Each deal is structured differently.

Down payments vary. They can be 30% to 50% of the assessed value of the firm.

So, a seller must find a buyer that is a good fit for clients. Clients should want to keep their accounts with the buyer's firm.

If possible, the buyer should offer something beneficial to clients that they aren't getting now. That could be another investment product or superior technology, for example.

The characteristics of the seller's and the buyer's firms must be as closely aligned as possible. What is the investment philosophy of each firm?

If an RIA has been espousing the virtues of passive management and been primarily using exchange-traded funds, selling the practice to a buyer that uses mostly active mutual fund managers and separately managed accounts would be a stretch. Similarly, a buyer that operates mainly as a discretionary stock picker isn’t a good fit, either.

Investment philosophy and product mix must be as closely aligned as possible.

What kind of fees are the firm’s clients accustomed to paying? If they will be paying more at the new firm, then there must be a compelling reason from the client's standpoint.
Are there separate fees for financial planning, or are those fees included in the charge for managing client funds?

What type of client service schedule are clients expecting?

How many meetings and phone calls usually take place over the course of the year?

Of course, the buyer must have the personnel to properly service client accounts in addition to that firm’s existing clients. This may include both investment people to run the money and a dedicated client service staff.

The buyer must also have technology that can help the new firm manage money properly and support client service efforts. Given the requirements of the fiduciary standard, RIAs need technology that can help them document their prudent decision-making process.

Finally, an RIA firm needs a buyer with which it can work closely.

There must be a good personality fit between buyer and seller. The buyer and seller must be committed to work as a team during the earn-out period to ensure the successful transition of the seller's clients.

There is always an abundance of suitors for a worthy practice. Finding the right buyer requires scrutinizing prospective buyers carefully.

Sellers aren’t just rewarded financially when they choose a buyer that is a good fit. They can move forward to the next chapter in life, confident that they have left clients who have entrusted their precious savings to them in good hands.

This story is part of a 30-30 series on smart strategies for RIAs.

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Mark Elzweig

Mark Elzweig

Mark Elzweig is president of executive search consulting firm Mark Elzweig Co. in New York.