Advisor attrition has emerged as the No. 2 reason that RIAs are losing business, according to recent research from Dimensional Fund Advisors.
In each of the 12 years of DFA’s global advisor benchmarking study, death has been cited as the No. 1 reason advisors lost assets—to the tune of 20% annually, according to DFA Head of Practice Management Catherine Williams. Over the past three years, however, nearly a fifth of RIAs reported losing an advisor—and that number is on the rise.
“Business owners should pay very close attention to that because, I mean, talk about a double whammy,” said Williams. “You not only lose the talent, but they take clients with them. That is a painful proposition.”
During DeVoe & Company’s annual Elevate conference in Nashville last week, Williams and other experts spoke at length about the importance of cultivating and retaining talent in an industry experiencing a shortage of its most valuable asset.
“Talent is the hardest part of our business,” said Jim Cahn, chief investments and business development officer at $67 billion AUM Wealth Enhancement Group. “It is the lifeblood of our business and it's really hard. You can't hire advisors. That's why we started doing M&A. You have to grow them, or you have to buy someone else that's developed them. You just can't hire an advisor.”
Much of the focus during the three-day event was around next-generation talent, equity and succession. Millennials and younger generations now comprise more than a quarter of financial planners in the U.S., according to the CFP Board, and more than half of all CFP advisors are under the age of 50.
CFPs represent just 96,000 of the approximately 330,000 financial advisors in the U.S. RIA space, according to data presented by Bluespring Wealth Partners President David Canter.
“For the first time ever, the number of CFPs that are below the age of 30 is equivalent to the number of CFPs that are above the age of 70,” he said. “Now that might not sound fantastic, but think of all the training, the exams, the apprenticeship learning that it takes.”
Firms wishing to attract and retain sought-after next-gen talent must establish clear career paths for those employees, said every expert who spoke on the topic. And more employees than ever expect to be given the chance to own a piece of the pie.
“They want to know they have opportunities for growth and advancement,” said Martine Lellis, Mercer Advisors’ chief talent and administrative officer.
“You've got to have clear job structures, and this is just very basic job title writing—job titles, descriptions, roles and responsibilities,” she said. “Very clear promotion criteria—how do I get from step A to B to C to D? Then you have to evaluate the performance metrics.”
Lellis recommended reviewing performance no less than twice a year and said she considers it unwise to tie advancement to tenure, preferring instead to reward good work in real time.
“Feeling like you have the ability to continue to succeed, to get better, to accomplish things is really critical,” she said. “And that engagement ultimately leads to retention of top talent.”
Williams said equity ownership has become increasingly important across all levels of the firm, including non-revenue-producing roles. She noted equity does not necessarily grant decision-making authority and suggested firms be clear upfront about whether stakeholders will have any meaningful seat at the table.
“Our data indicates that for those high performing firms where that's a well-built muscle, they have much higher employee retention and significantly higher growth rates,” she said.
“I can't stress how much this has become a huge part of compensation,” said Lellis. “We are seeing more programs where it's not requiring a buy-in, and we are seeing broader sharing of this.”
DeVoe & Co. founder David DeVoe and Williams both said they would prefer to see most firms sell equity to employees rather than including it as part of their compensation package.
“You want them to write a check,” said DeVoe, making the distinction between being rewarded for individual labor and benefiting from the success of the collective firm. “Your ability to separate those is important.”
Many top G2 and G3 advisors are looking for more meaningful ownership opportunities, said experts, whether that means an internal succession they can take part in or leaving to launch their own practice.
Only a quarter of firms in the DFA benchmarking study have a defined succession plan in place, said Williams. She cited procrastination as the primary reason, followed by the desire to sell internally while uncertain of which advisors will take the reins and how they’ll afford it.
As firms have grown and become more complex, she said it’s increasingly common for owners to transition to a group of G2 or G3 employees that can share the cost and responsibilities.
Equity can play a useful role in the gradual transition of a firm, and there are creative ways to solve the financing question, according to a panel of experts from credit and lending institutions, but internal succession often means a steeply discounted valuation.
“There’s a lot of internal succession taking place,” said Dustin Mangone, director of PPCLOAN’s investment advisor program. “A lot of times the companies aren't dealing with external valuations. They've created some internal formulas that, ultimately, are a discount. But it's a program that's been in place that works well for everyone involved.
“The discount’s necessary,” he said. “If you really just break it down, when you get to the 10 times and higher multiples, the distributions aren't going to cover the debt payments after taxes.”
“I've seen some creativity internally that's allowed maybe 9, 10, 11, 12 times multiples to work," he noted. "You might end up paying back the debt over 12, 15 years. But, it's an alternative to having to potentially discount the business by 20% or 30%.”
Oak Street Funding President Alicia Chandler said lack of communication between ownership and next-gen employees poses another major impediment to successful transition.
“Founders syndrome” happens when an owner keeps pulling back on promises to sell internally, she said.
“Over time, there's that kind of question of whether it's ever going to happen,” she said. “Those individuals may become disenchanted; they might want to leave.”
“G2 can get impatient and can leave,” agreed James Hughes, head of investment advisory lending for Live Oak Bank. “There's lots of examples of conversations I had where they're getting frustrated and then I see a LinkedIn post where they've moved or started their own firm.”