Registered investment advisors are not in a position to pass the baton to the next generation, and the situation is getting worse, according to a survey by DeVoe & Company.
A majority of RIAs have little confidence that the next generation is ready, according to the "2022 RIA Talent Management Study: Culture and Engagement in a Post-Covid World." Released today, the survey found that the percentage that have low confidence in the next generation’s ability to take control has grown from 57% in 2019 to 68% this year.
RIAs are finding the Covid pandemic caused profound changes in the financial industry, with advisors trying to return to an office environment at the same time they continue some remote work, combined with the “big quit,” the report said. The study included more than 100 representatives of RIA firms with more than $100 million in AUM, who were senior executives, principals or owners.
“The pandemic was a shot across the bow for RIAs in that it made many of them realize they do not have a succession plan,” David DeVoe, founder of DeVoe & Company, a consulting and research firm that focuses on the financial industry, said in an interview. “Suddenly, the problem became very real. The question became: How do we keep the team together?”
The question of successful succession is rooted in the firm’s compensation plan, which encompasses much more than just the money, DeVoe explained. A good compensation plan is specific about what is expected from advisors and provides the leadership that they need to get there, he added.
One-quarter of executives in the survey said RIA cultures have been negatively impacted by the post-Covid environment, including a spike in attrition. Overall, 37% experienced heightened employee resignations, with larger firms experiencing a higher impact. Forty-five percent of the firms with more than $1 billion in AUM reported increased attrition post-Covid.
Although the survey showed a little improvement in succession planning, RIAs seeking to sell internally still are faced with a “next-gen readiness challenge (which has) steadily increased each year.”
“Even for those firms that think they have a good compensation plan that includes a career path for advisors, once you drill down, the plan can be lacking,” DeVoe explained.
But the survey also found that “advisors have slowly but steadily started putting succession planning gears in motion. In our view, Covid was a kick in the pants for firms that didn’t have a transition plan in place,” the firm said.
To help combat the succession challenge, “firms need to have a rock-solid succession strategy that includes training new leaders and coaching them as they begin taking on leadership responsibilities,” the firm advised.
“As part of this process, firms must consider migrating equity in preparation for transition of leadership. Overall, succession plans are still extremely low, especially for an industry with so many owners approaching retirement age,” the report warned.
The solutions to the failure to enact succession planning will not come easily. “Areas of vulnerability, such as culture, engagement, and retention, will require robust succession plans and talent management strategies in light of the increased demand for hybrid work opportunities and shifting talent needs,” the firm said.
Some improvement is being seen, as advisors are getting better at providing career paths and advancement for employees and improving compensation plans, the firm said.
At the same time, “decisive action is needed to protect an RIA firm’s most important asset: its people. Addressing areas like performance management, employee development and diversity hiring will help firms boost engagement, retention, and overall satisfaction as they look toward the future,” the firm said.
“The way forward requires intelligently designed, methodical talent management programs," the firm said. "Firms also need managers who will lean into leadership development and succession planning. Fundamentally, greater attention to optimizing human capital leads to stronger firms and a more vibrant industry.”