As RIAs prepare to transition leadership to the next generation, more than half of current firm leaders feel their potential successors are not up to the task, according to a report released Monday by DeVoe & Company.
Fortunately, there are steps RIAs can take to help rectify the situation, according to the report, “It’s Time for a Human Capital Revolution.” The report is based on the DeVoe RIA Next Gen Transitions Survey, which included 118 RIA senior executives, principals or owners of firms ranging in size from $100 million to more than $5 billion in assets under management.
According to the survey, 57% of the survey participants feel their next generation of leaders is not ready to take the reins of their firms.
“The industry is on track to experience a surge in transitions, but the planning for that is not keeping pace,” the report said. “The RIA industry is aging, especially among firm leaders. Most advisors plan to sell internally – a wonderful trait about the industry.” However, 13% said that selling internally would present a significant or severe challenge..
The feeling increases as the size of the firm increases. “A staggering 89% of firms with AUMs between $750 million and $1 billion are not confident in their next generation’s ability to make the transition. This is a surprisingly high number, especially for firms that have accomplished a degree of scale,” DeVoe said.
Some of this is the fault of the RIA, DeVoe said. Sixty-five percent of RIA firms are not providing adequate performance reviews, 49% are not providing clear career paths and 59% think the next generation would benefit from more coaching.
“Just as elite athletes hire coaches to take their game to the next level, today’s top RIA leaders understand that an experienced, trusted partner can accelerate the achievement of their goals,” David DeVoe, founder and CEO of DeVoe & Company, said. “Whether it’s an external coach or senior leaders’ coaching next-gen advisors, these engagements can make all the difference.”
RIAs also fall short in providing well-balanced compensation for the next generation, the report said. “The most common RIA advisor compensation plans focus too heavily on the wrong metrics. Typically, compensation plans are tied to the revenue that a client-facing employee oversees. The unintended consequences [of this practice] are profound.”
“This type of compensation model incentivizes the ‘hoarding’ of client relationships. Eventually, an inflection point will occur. An advisor will no longer have time to bring in new clients, and this precious business development skill is left unutilized,” the report said.
It is time for advisors to invest as much energy in their staff as they do their clients, noted DeVoe. “It is time for advisors to use their passion and technical skills to craft human capital models that are as powerful as their client service models,” DeVoe said.