The RIA industry is at an inflection point. A wave of retirements is coming, but succession planning at many firms is embryonic. The aftershocks of COVID-19 have forced the traditionally in-person business of RIAs online. Given these changes, we asked a few members of Capital Group’s inaugural RIA Advisory Board the following: What could the RIA firm of the future look like?
Given the pandemic, many ─ if not all ─ industries are undergoing a fundamental review of how they operate. But even before COVID-19 came on the scene, the RIA business was already in the middle of a transformation.
The average RIA owner is in his or her early 60s, and 34% of RIAs say they plan to retire within a decade.1,2 But among those planning retirement, 22% say they don’t have a succession strategy.2 And the aftershocks on society from the spread of COVID-19 have forced the traditionally in-person business of RIA online, further exacerbating the succession crisis.
Given these forces of change both within and outside of the industry, we turned to a few members of Capital Group’s inaugural RIA Advisory Board for their feedback: What could the RIA firm of the future look like?
Before this spring, the number of mergers and acquisitions transactions in the RIA industry had grown quarter over quarter for the past two years. But in the first half of 2020 during a pandemic-driven bear market, RIA acquisitions dropped sharply. Transaction numbers are starting to tick back up, albeit at lower valuations and down payments.
But advisors are not prepared to hand over the reins to their internal successors. More than half, or 57%, of advisors say they are not confident that the next generation is ready to run their firm, and 13% say transferring to the next generation would be a “significant or severe challenge,” according to a June Study Report by DeVoe & Company, which is headed by Advisory Board member David DeVoe. (DeVoe and Company also publishes a quarterly M&A Deal Book.)
Notably, larger firms ─ those with $750 million to $1 billion in assets under management ─ are less confident in an internal succession plan, even though the size of these firms typically means they have more resources to dedicate to career training and succession planning. “This is cause for alarm,” the DeVoe study states.
The M&A activity that has taken place so far this year has been largely concentrated in the larger firms, which were seeking more professional management, following an existing industry trend. M&A activity for smaller firms has dried up ─ they simply didn’t have the bandwidth to both attend to clients and pursue operational activities.
The decline in activity and the different responses based on firm size illustrate that the RIA industry needs to focus on human capital development, the DeVoe report said. A wave of retirements is coming. Whether or not the industry successfully rides it ─ or gets swallowed up by it ─ depends on how well it develops its next generation.
“We have to get better at applying ourselves as professional organizations,” said David Root, Jr., founder and CEO of DBR & Co. in Pittsburgh, PA.3 “I think so many firms are run as sales organizations, where they’re focused on going out, getting new clients and gathering new assets.”
To get a glimpse at where the RIA industry could be headed, Kurt Miscinski, partner, president and CEO of Cerity Partners and member of the RIA Advisory Board, decided to take a look at the past. “I looked at business history to understand how certain things evolve or not,” he said.
He noted that law and accounting firms started out as solo or small shops catering to a small and localized clientele. Likewise, the RIA industry began about 30 years ago with individual advisors who, seeking more control over their businesses and how they help their clients, decided to leave wirehouses and establish their own firms. Over time, some of those accounting and law firms grew into multinational firms with a global clientele. So, if those industries developed this way, he asks, why not wealth managers?
“Can one or two RIA firms break out and become a global wealth management firm and be sustainable?” he asked. “That’s probably the evolution of the independent wealth management industry. I’m hoping we’re the first breakout.”
Instead of speaking about “aggregators” and “consolidators,” RIA firms could more resemble the multinational organizations typical of other professional services firms, Miscinski added.
Howard Coleman, chief investment officer and general counsel at Coldstream Wealth Management and member of the RIA Advisory Board, agreed, saying that his firm is actively looking to either merge with or acquire an equal. “We’re about $3.5 billion and we’d like to be twice that size,” he said. “The goal was to do one [acquisition] a year, but we haven’t done one for two years. Valuations were too high.”
With the disruption from COVID-19, Coleman said he expects to see a “mini-boom in transactions because valuations are more realistic.”
In the meantime, RIA practices are undergoing a rapid transformation because of the pandemic. In firms of all sizes, advisors are working from home and relying on technology to consult with each other or with clients.
“There was an unspoken judgment and stereotype in the industry that if you weren’t coming into the office, maybe you weren’t working hard,” said Miscinski.
But both he and Coleman said that since the lockdown started, they have interviewed, hired and onboarded new employees completely remotely. “It’s worked remarkably well,” Coleman said. “We were able to do orientation, get a sense of what a person is like and the quality of their work ─ all remotely.”
Catherine Farley, president of Finserv Operations Consulting and an Advisory Board member, got a taste of making virtual operations work to the extreme. Her former firm was in the process of being acquired just as the shelter-in-place orders were being given in March.
“People felt very disconnected because they’re used to being in the office together, and on top of that they’re unsure of their jobs, have new bosses,” she said. “You can’t walk to Starbucks and talk about what’s going on. You’re going to have a lot of insecurity.”
Farley, who is continuing to work with the acquiring firm in a consulting role, said “managers must reach out more proactively now that you can’t drop by an office anymore.”
In addition, Farley said the firm is experimenting with monitoring software ─ as are other RIAs as work has shifted to home offices ─ to get an idea of who’s working on what and how well they are doing. “You could have eight of the 10 who have finished work in this period of time, but one or two is faster or slower,” she said. “Do they need training? The person who’s excelled, what are they doing differently?”
From acquiring new firms to day-to-day employee management, COVID-19 has forced RIAs to rapidly adopt technology tools into their practices, and those changes are likely to be lasting.
“I’ve missed the personal contact, but it’s been efficient,” Coleman said. “I’m certainly not planning on coming into the office five days a week again.”
1 DeVoe & Company Study Report. “It’s time for a human capital evolution,” June 2020.
2 Cerulli. “U.S. RIA Marketplace,” 2019.
3 Velati, Alyson. “RIA founders Postpone Retirement Plans, Lacking Faith in Next Gen: Report.” June 10, 2020.
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