Succession planning is slipping down the priority list at many RIA firms as leaders focus on growth and optimizing the business. But delaying those decisions is narrowing exit options and increasingly driving founders toward external sales, according to David DeVoe, head of investment bank and consulting firm DeVoe & Company.

RIA owners often form strong emotional bonds with younger advisors as they build their firms and most would prefer to see the next generation take over, says DeVoe, a member of Capital Group’s RIA Advisory Board and a leading authority in the RIA space on mergers & acquisitions (M&A) strategy and succession planning. 

But competitive pressure to scale, rising client demands for more services, and a wave of private equity-backed acquisitions by consolidators are steadily pushing RIA equity valuations beyond the reach of next-generation advisors – and founders into the M&A market, DeVoe told the board.

According to research firm Cerulli, the number of firms with $5B or more in assets under management (AUM) has been growing at a faster rate than any other RIA size segment in the past few years. In 2023 there were 274 firms in the $5B-plus category, almost 20% more than the year before. RIA consolidators now account for $1.5T in AUM up from just $506B in 2019.¹

This means RIA owners who want the option of passing the reins to their next generation advisors need to start succession planning well before planned retirement, when their equity is typically more affordable. “Realistically, owners should start thinking about these things when they have around $100 million in AUM,” says DeVoe. “If you hit $1 billion and haven’t sold any shares internally, you could be in a tough spot.”

Three core succession moves

“These things” refers to three essential components of succession planning: a clear exit strategy and vision for the company, a methodical approach to compensation and migrating equity to future leaders, and a talent development plan to ensure internal buyers are prepared to run the company.

These elements must be intricately connected and synchronized, so that owners can gradually sell equity in tranches and pass on responsibilities to a successor over a period of time. 

Yet succession planning is not just an exit strategy – it’s foundational to building a sustainable enterprise, says DeVoe. 

“The very presence of a succession plan will not only create a stronger future for the firm but will also increase the value of the RIA to most sophisticated buyers, regardless of whether next-gen can fully afford to buy out the founders,” says DeVoe. “A succession plan will naturally spur higher employee retention.”

1. Have a vision for succession

Despite the stakes, succession planning remains an industry weak spot. DeVoe’s 2024 survey of RIAs with $100M or more in AUM found that only 42% of firms had written succession plans, down from 50% in 2021.²

“I get it. Succession planning is a complicated process which can involve tens of components,” says DeVoe. “But owners are better served by chipping away at their plan and starting to put the building blocks in place early.” 

But procrastination may not be the only factor that’s stalling the process. DeVoe suspects that with valuations so high, many RIA leaders are giving up on the idea that their next-gen advisors can afford a buyout – and are actively choosing not to plan for succession. 

Only 20% of founders surveyed believed their younger advisors could buy them out, down from nearly 40% in 2021.³

DeVoe estimates that internal sales can be valued as much as 45% lower than what external buyers would pay. The average discount on internal sales of equity is around 25%, but he has seen it stretch to 50%. 

Valuations continue to climb as aggregators target RIAs. There were a record 148 transactions in the first half of this year, up 17% versus the same period in 2024, according to the Capital Group and DeVoe RIA Deal Book. Private equity-backed consolidators accounted for more than half of all deals. 

As much as many owners dream of seeing their firms live on with trusted stewards at the helm, the economics of an internal sale are often hard to ignore.  “The lack of succession planning and the increased valuation of RIAs are conspiring to create a perfect storm,” DeVoe told the board. “We’re likely to see more external sales, and record high external valuations are part of the reason.” He believes succession planning could soon surpass scale as the top driver of external RIA sales.

2. Train your successors

Another challenge: Next-gen readiness. Surprisingly few owners expressed confidence in their younger advisors’ business acumen.  

According to a 2024 survey by DeVoe, 11% of firms said they had no second-generation candidates in place to assume control today if needed, and only about a third believed their next-gen advisors were ready to run the business.⁴

“These numbers are especially concerning, considering all survey respondents are at firms that manage at least $100M in assets – large enough to have second generation candidates in house,” says DeVoe. 

The industry is shifting toward more formal talent development programs, especially as the competition for talent intensifies among growing RIAs.  

Still, there is a long way to go. In 2024, 60% of firms lacked mentorship programs and only 15% offered extensive training for junior employees, according to DeVoe & Company’s 2024 talent management report. Just over half (52%) of firms surveyed offered long-term career paths – better than 2023 but lower than 2022.⁵

3. Align compensation, talent development and growth

Compensation should work in tandem with performance reviews and advisor training. DeVoe advises founders to start structuring their compensation models with their company’s vision and goals in mind. The model should clearly demonstrate how an individual contributes to a company’s goals, which helps set the stage for clear performance reviews, coaching programs and long-term career paths. 

Despite the logic, fewer than half (49%) of RIAs surveyed last year had a methodical compensation plan. And DeVoe believes many of the ‘methodical plans’ he sees are not structured well.⁶

“Many advisory firms struggle with the tyranny of revenue-based comp,” says DeVoe. “It often breeds a ‘hoarding’ mentality, where advisors focus on collecting as many clients as they can.” The result is often a decline in client service standards, growth — or both. 

Equity sharing also plays a critical role in long-term employee retention, whether it’s distributed through performance-based equity buy-in opportunities or deferred equity as part of overall compensation.  

Seller financing is a common way to finance an advisor’s purchase of an initial small stake. The owner acts as a lender, allowing the buyer to pay using their increasing share of profits as well as compensation to gradually acquire the owner’s stake in the firm. The full sale can take up to 10 years or longer. 

Alternatively, next-gen buyers can also take out commercial loans to buy equity and pay the owner up front. 

Bottom line

Succession planning is never easy. But owners who start selling equity early and align that strategy with compensation and training may have more exit options and a foundation for sustainable growth. 

There are also many resources available to help RIA owners execute on the core components of succession, including our team of practice management specialists.

Crucially, for firms that may have outgrown the feasibility of an internal sale, succession planning is still indispensable for attracting and retaining top talent as an RIA continues to scale. 

Having the three core components of succession planning in place can also improve valuations. External buyers tend to place a premium on firms with compensation and career development structures in place that encourage employees to stay post-acquisition.

“Most advisors get overwhelmed with the succession planning process because of the number of variables involved,” says DeVoe. “But each step of developing a succession plan will help create a stronger organization, more engaged employees and ultimately happier clients.”