Turnover has been especially high among registered investment advisors post-Covid, and it's forcing more firms to consider their succession plans.

A survey by DeVoe and Company, an RIA consultancy, shows that 37% of some 100 RIA firms said they experienced greater-than-average turnover in 2021.

Big firms were impacted more severely: While 45% of those managing $1 billion or more reported greater than normal attrition rates last year, just 29% of firms managing less than $1 billion said the same.

There were 1,647 new registered advisors in 2021, while 721 advisors terminated their registrations, for a net addition of 926 firms, according to the Investment Adviser Association.

But most of the new firms were small. Meanwhile, there were 23 fewer advisors managing more than $1 billion in assets at the end of 2021.

Factors Driving Turnover

Advisors at larger firms report greater lasting negative effects from the pandemic compared to advisors at smaller firms.

The DeVoe survey found that 37% of firms with more than $1 billion in assets under management reported a somewhat negative or worse impact on culture, compared with just 11% for firms with less than $1 billion in client money.

Markets also added to stressors.

“Back when you could just ride this thing and the fees went up every quarter, it was hard to think about retiring,” said Bill Willis, president and CEO of Willis Consulting, which specializes in financial advisor recruiting. “Now that you start the day with panic calls of ‘Why are we in this market?’ it's a little bit less fun, and maybe it's time to pass the baton to someone younger.”

Willis also said turnover is a generational issue for the industry.

“When we look at advisors, it is an aging population in all spaces. And you know, there's a supply-demand problem. ... We're not minting new advisors anywhere near the rate we used to, for a number of reasons. And therefore, the population is getting older. So that's a major industry problem.”

Firms Failing to Future-Proof

Executives are increasingly having to think about how to retain senior talent and develop succession plans.

And many are woefully unprepared.

In fact, 68% of RIA firms said their second and third generations would not be ready if the company had to transition leadership today, compared to 57% in 2019 and 61% in 2021, the survey indicates.

But the path for younger staff has become clearer: 59% rated career pathing for advisors as “clearly articulated” this year, up from 51% three years ago.

Willis said this kind of planning is a necessity to give mid-career advisors enough experience to assume senior roles.

“I would say that at minimum that person needs to be aboard two years before a senior advisor decides to hit the road,” he said. “Maybe the senior advisor doesn't leave completely, but just slowly begins to diminish more and more of their responsibilities.”

Rich Policastro, president of Round Table Wealth Management, said that developing retention strategies is critical.

“If it's not an internal succession plan, what are you going to do to make a senior in your firm more valuable to the firm that may be acquiring them or keep them motivated?” Policastro said.

Often that means giving younger advisors a stake in the long-term growth of the practice.

“What we're seeing is that firms that are not ready to sell or merge, but don't have a literal succession plan, they're implementing equity compensation to folks that are more senior within the firm,” Policastro said. In some cases, that’s “phantom equity,” or a long-term incentive that only matures over time.

Firms surveyed by DeVoe echoed this trend: 57% rated their compensation plan as “clear and methodical” in 2022, up from 46% in 2019.