The importance of financial advisor compensation in succession and mergers & acquisitions
A recent surge in wealth management dealmaking is underscored by the importance of financial advisor compensation in succession planning and mergers and acquisitions within the industry. In 2024, registered investment advisory firms experienced substantial growth and record-breaking deal volumes fueled by the imperative need for succession planning among aging advisors and the desire for enhanced capital and scale. Sellers navigating the complex landscape of potential acquirers are increasingly factoring in the compensation of internal succession partners, ushering in a new era of compensation models according to a webinar hosted by M&A consulting firm Succession Resource Group.
This shift in compensation strategies has been significant in recent years, moving away from traditional production-based models such as a percentage of revenue or gross dealer concessions towards a more sophisticated system known as “base-bonus profits.” This model, as described by David Grau, founder and CEO of Succession Resource Group, revolves around a salary and bonus structure tailored to reward professionals as either “farmers” or “hunters” within the RIA. Furthermore, as Parker Finot, the director of transaction advisory services at Succession Resource Group, acknowledges, the traditional compensation method may pose challenges, particularly in the context of structuring internal equity, separation of profits, and transitioning ownership.
The findings from Succession Resource’s study align with research from Cerulli Associates, which indicates that over a quarter of advisors nearing retirement lack a concrete succession plan. On the other end of the spectrum, rookie advisors face a discouraging failure rate exceeding 70% within their first five years in the industry. This trend highlights the urgency for further industry consolidation through M&A activities, prompting wealth management firms to empower long-term advisor retention and foster career paths through teamwork strategies.
Succession Resource’s report drew from data collected from 176 RIA M&A transactions totaling $13.3 billion in assets under management in 2024, shedding light on various market dynamics and operational benchmarks. Noteworthy takeaways from the report include information on deal multiples, buyer profiles, payment structures, financing options, and retention practices among sellers. Additionally, survey results from over 300 industry participants underscored the looming retirement plans of many advisors, the dearth of established succession plans, and the emphasis on internal staff as preferred buyers in M&A scenarios.
As the wealth management landscape continues to evolve, the critical role of financial advisor compensation in succession planning and M&A activities remains at the forefront of industry discussions. By aligning compensation structures with organizational goals, firms can navigate the complexities of succession planning, enhance advisor retention, and drive sustainable growth in an increasingly competitive market environment.
