Solving succession: how the fate of RIAs depends on their plans

Solving succession: how the fate of RIAs depends on their plans

Often, the only way to get control is to give it up.

It’s the kind of puzzle Buddhist monks contemplate when they consider the contradictions of life. It’s also an uncomfortable truth for the first generation of independent planners, who are grappling with the prospect of their firms’ futures without them.

Or failing to plan, as the highly ironic case may be.

“For a lot of advisers, their comfort zone is their client relationship. They want to keep control of clients,” says Tim Chase, CEO of WMS Partners in Towson, Maryland, who is in the enviable position of having an internal succession plan in place at the firm he helped found. “As long as they do that, those [younger planners] below them can never rise up.”

Tim Chase, CEO of WMS Partners in Towson, Maryland

Tim Chase, CEO of WMS Partners in Towson, Maryland, spent 10 years on his firm’s succession plan. (Photo credit: Joshua Roberts)


Nor can their firms.

But advisers who do plan ahead can create tremendous value in the form of equity, unlimited growth potential and a Zen-like peace of mind for all involved. The many beneficiaries include clients, ambitious younger partners and the founders themselves.

Chase, 53, has been working on a succession plan for the past 10 years, along with his co-founder Martin Eby, allowing time for a gradual but profound evolution.

Over the years, Chase and Eby have encouraged younger partners at WMS to buy into the 25-year-old firm that now has $3.4 billion in assets under management. Typically, they do so at a rate of about half a percent per year.

Annual income produced by the shares helps finance purchases: If, for example, a partner put $20,000 down to buy a $100,000 stake, about $12,000 to $14,000 in annual income can pay it off in less than 10 years, Chase says.

The firm is growing so quickly — it has doubled in size over the past five years — that partners are eager to buy in, Chase says.

With 56 employees today, WMS is expected to grow to about 100 within the next five years, Chase says. Senior partners are somewhat reluctant sellers of appreciating shares, but over time they have come to realize that offloading equity is key to making internal transitions work, he adds.

Another important element to WMS’ plan is protective provisions, such as requiring any partner who tries to take a client and leave to buy that business from the firm. It also helps that Chase, Eby and another partner retain veto power over the younger generation through their majority stake in the firm.

As a result, even the prospect of relinquishing his CEO role to a younger partner in the next year doesn’t worry Chase. He expects he’ll become chairman and drive as hard as ever toward recruiting top-flight talent and building the firm’s strategic direction, while not being distracted by daily operational issues.

“There are no issues at all,” he says. “I know the decisions we make today as a 15-partner firm are infinitely better than when we were a two-partner firm. The difference between an empowered team and an individual is night and day.”

In other words: surrender to win.

Michelle Scarver (left), Conrad Netting (center) and Don Pace (right)

Michelle Scarver (left), Conrad Netting (center) and Don Pace (right) spent nearly seven months producing an itemized 21-page document that served as a blueprint for the future of the firm Netting and Pace founded with them no longer at the helm. (Photo credit: Josh Huskin)


Successful succession planning “has so much potential to unlock power within an organization,” says David DeVoe, founder of DeVoe & Co., an investment bank and consulting firm that advises firms on continuity.

The issue is a pressing one: The average age of firms’ founders is 61, and many are still working well into their 70s, according to DeVoe & Co.

In all, 60% of RIAs either have no succession plan or have one that isn’t ready for implementation, Fidelity found in its most recent RIA benchmarking study.

And without a plan, firms lose the chance to unlock one of their most valuable opportunities: engaging in M&A. This is particularly true now, as the M&A pace has picked up.

There were 142 M&A transactions last year in the advisory space, compared with 59 in 2013, DeVoe & Co. found. And DeVoe forecasts an unprecedented increase in M&A in the RIA space over the next five to seven years.

The pressure to consolidate is relentless, driven in part by higher operating costs for regulatory compliance and technological evolution, both of which are pushing companies to band together for scale. Many in the industry expect the best of today’s RIAs to grow into the super brands of tomorrow, positioned to rival or even displace the wirehouses and banks.

But only marketable firms — those with either fully viable enterprises or even just loyal books of business that will follow a founder’s recommendation to an unrelated successor firm — can do a deal.

That’s why DeVoe and other experts are urging founders to start thinking about succession at the very beginning of their careers.

As an example of how well early planning can work out, DeVoe needn’t look further than one of his own partners, industry éminence grise Tim Kochis, who helped build one of the country’s largest RIAs.

Kochis, who now works with DeVoe at his consulting practice, co-founded an RIA, Kochis Fitz, more than 25 years ago. Within a few years of the firm’s launch, Kochis and his partner, Linda Fitz, had already transferred stakes to new partners.

“The earlier you start the equity transfer and get serious about what equity ownership means — how much governance, how much control is part of that ownership — it plows the path for management transition,” Kochis says.

In 2008, Kochis Fitz merged with wealth management firm Quintile. This combination would go on to create one of the largest — and most broadly owned — independent RIAs in the industry, Los Angeles-based Aspiriant, with 57 partners. Kochis retains a stake and sits on the firm’s board.

Planning for succession from the very start also changes the kinds of hires that firms make, Kochis and others say. Hiring someone who can eventually replace you is quite different from hiring someone to merely fill a job.

If a firm brings on planners and future equity partners who are possible future CEOs, then it is in a position to have a long-term internal succession strategy. Yet many don’t. It’s an exceedingly common mistake made by firm founders, who often find the consequences extend far beyond everyday workplace frustrations. Subpar hires can suppress a firm’s value and, thereby, the value of a founder’s retirement.

And firms that don’t plan, even after decades in the business, risk running out of time to come up with any solution at all.

DeVoe recalls a midsized San Francisco firm whose founder died of an aneurysm, years ago, in his late 50s.

As clients took their assets elsewhere, DeVoe says, “Over the course of months a $600 million firm [in assets under management] literally just disappeared from the marketplace.”

Every year, the succession consultant Philip Palaveev says he gets calls from firm founders who have been diagnosed with cancer. Often it’s too late to do anything about the complex and time-consuming process of succession, Palaveev says. Many experts advise a 10-year runway to plan for internal succession.

“Man proposes, God disposes,” Palaveev says. “Nature may retire us before we are ready.”

Four years ago, after paying his respects at a flurry of funerals, Conrad Netting realized it was time to look the prospect of succession straight in the face. He and his co-founder, Don Pace, were nearing 70 after building their tax-focused practice, Netting & Pace of San Antonio, Texas, to nearly $200 million in client assets.

It was during a Schwab transitions program that Netting decided it was time to take action. “We thought, we really have to protect our clients, number one, and our employees, number two, and ourselves, number three,” Netting says. “That was the order with which we felt like the procedure needed to go.”

The pair and their partner Michelle Scarver — nearly 25 years their junior— spent nearly seven months figuring out how the firm had evolved over the years. With Schwab’s help, they defined what they wanted out of a transition. They ended up with a 21-page document that itemized all these details and became a blueprint DeVoe used when he became their consultant.


“Man proposes, God disposes,” succession consultant Philip Palaveev says.

Along the way, they discovered they had come to the subject of succession too late to accomplish their first choice: a fully internal plan. Had they started their planning a decade earlier, their talented younger planners might have bought into the firm.

By the time the co-founders began to think beyond their own tenures, the firm’s valuation was so high that a buy-in was too expensive.

Yet, fortunately, nearly 20 years earlier, the co-founders had landed a great hire in Scarver who would help solve their succession challenge.

In 1999, Netting advertised for a tax preparer as part of the partners’ plan to build a holistic planning practice. Scarver, an experienced investment manager with a banking background, called to respond.

While she had no experience in tax preparation, Scarver told them she was a CPA with a personal financial specialist credential, a still-new designation that was then less than a decade old.

Even over the phone, Netting says, they could sense that “this is absolutely somebody we are looking for: the nouveau CPA who is looking just beyond the standard skill sets.’”

Nearly nine months pregnant when she was hired, Scarver took the job, had her baby and grew into a position of authority, slowly taking over more and more management as heir apparent, albeit one without an equity stake. The trio orchestrated the shift so gradually that, Netting says, the transition of authority has been seamless for clients.

Michelle Scarver, Exencial Wealth Advisors

Scarver ensured that Netting & Pace of San Antonio, Texas, made a seamless transition into the fold of Exencial Wealth Advisors. (Photo credit: Josh Huskin)


Though they hadn’t brought Scarver on as a partner earlier, she became the key to making their late-in-the-game succession strategy work.

In 2014, the three planners went looking for potential buyers using their 21-page manifesto, and met with more than 20 prospects.

In April of last year, another tax-focused firm, Oklahoma City-based Exencial Wealth Advisors, with $1.8 billion in AUM (“They’re us, but bigger,” Scarver says), bought Netting & Pace for undisclosed terms, and made all three planners equity partners.

As a fully operational next-generation leader, Scarver was key to the transaction. “The impression I got from everyone was it wasn’t much of a deal without Michelle,” Netting says.

Without her, Scarver says, “the concern would have been, ‘Would the clients have stayed on?’ This is a very personal business. The two years that we were contemplating this, we were really positioning this to clients by saying that, if Conrad and Don aren’t here, Michelle will take care of you.”

Today, Netting adds, “we can absolutely with a straight face tell our clients that very little has changed. There was no giant exodus to the Oklahoma office. Exencial signed a five-year lease on our space. They signed contracts with Michelle and me and Don, so we aren’t going anywhere.”


“We thought, we really have to protect our clients, number one, and our employees, number two, and ourselves, number three,” says Conrad Netting of Exencial Wealth Advisors.

The deal exemplifies two of DeVoe’s key points: Smart hires and early planning are essential to getting deals done. “When you put a succession plan in place, you are mitigating risk,” he says.

A smartly designed succession plan sets into motion a virtuous cycle, which throws off many benefits. With a clear road forward, clients feel more secure and often start making new rounds of referrals, DeVoe adds.

Another reason to move sooner rather than later: Mandatory succession planning is under consideration at the SEC as a potential fiduciary requirement for all RIAs.

And, finally, founders find they have more freedom to do what they want with their time and lives, having achieved that rarefied enlightened state that comes with learning to let go.

“Michelle doesn’t come running to me with the drama of the day,” says Netting, who still works full-time most days at the office, just because he wants to. He’s a trustee on half a dozen clients’ trusts.

“I will do that as long as I have any breath in me,” he says, but he can also take time to play the piano and work on a long-standing book project.

“I used to think I was chained to the desk and that was really where my love was,” Netting says. “But when you can wipe your brow and say the clients are taken care of and the employees are taken care of, you can kind of take care of yourself.”

Article published by Financial Planning May 1 2017

Written by Ann Marsh