The RIA industry is likely to face succession hurdles in the coming years as a majority of large firms reported insufficient investment in the next generation of leadership.
Advisers’ current level of confidence in young leaders to take over firm operations is “shaky at best,” according to the DeVoe RIA Next Gen Transitions Survey released Monday. More than half (57%) of the 118 RIAs surveyed responded that a transition from founders to the next generation would be “bumpy” or worse and 13% said it would be a severe challenge.
Human capital management among RIAs is still lagging despite the significant lack of confidence in the next generation of firm leadership. The survey results showed 65% of RIA firms are not providing adequate performance reviews, 54% of firms do not have clear incentive compensation plans, and 49% of firms are not providing clear career paths for their employees.
“There needs to be some urgency here,” said David DeVoe, founder and CEO of DeVoe & Company. “The industry is on the precipice of a succession planning crisis. [RIAs] are aging and advisory owners are moving toward retirement, and still, two-thirds of firms don’t have a succession plan in place.”
The survey gathered responses from senior executives, principals and owners of RIA firms ranging from $100 million to $5 billion in assets under management from November 2019 through January 2020.
“Most advisers admit, to me privately, that they’re not great at managing their [employees],” DeVoe said. “Which is interesting because they have so many processes in place to take care of clients … that type of empathy and engagement once applied to their own staff, [RIAs] could really unlock great potential.”
The acknowledgement that advisers are not experts in human capital planning is a small step toward improvement. In fact, human capital planning is 75% of the expense structure for an RIA, he noted.
“That expense is huge,” DeVoe said. “RIAs can have a team that produces these wonderful results but if [human capital] processes aren’t in place you can have a company that can stagnate and even create a toxic environment.”
For DeVoe, the most surprising result from the study was the higher interest for external coaching versus internal guidance. In fact, 59% of advisers responded that the next generation of firm leadership would benefit from external coaching compared with 36% of advisers that believe internal coaching would be beneficial.
“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,” DeVoe said. “Even baby steps are going to start to unlock momentum and get that snowball moving downfield.”