As the average age of RIA leaders and the size of their businesses continue to increase, formal succession planning seems to be on the decline.
This is according to DeVoe and Co.’s 2024 Talent Management Report, which shows that RIA founders are nearing retirement age in record numbers. This trend alone makes the need for a solid succession plan increasingly urgent, as does the typical founder’s natural desire to make sure that clients and staff are cared for in the future.
Nonetheless, from 2021 to 2024, the number of firms with written succession plans sank from 50% to 42%. This is despite more firms serving their clients in a fiduciary capacity — meaning that they have an explicit duty to engage in business continuity planning.
“It is not only concerning that the number of written plans has been decreasing, but also alarming that the level of planning has hit a new low — its lowest level since our survey has been tracking it,” the report warns. “Ironically, an industry with ‘planning' and ‘risk mitigation’ as core components of its value proposition is failing in these very regards.”
There is some good news, according to the report. Firms without succession plans are “starting to lean in and do the important work” of creating their plans, and for the past four years, the number of RIAs that don’t have a plan but plan to draft one has steadily increased.
Today, 30% of surveyed RIAs have moved into planning mode, according to DeVoe. This marks an 8 percentage point increase over the study period. Additionally, those “not considering” a succession plan have been in steady decline to an all-time low of 8%.
“Together, these trends signal that more firms are making the commitment to crafting a succession plan and they represent a silver lining to the overall succession cloud hanging over the industry,” the report concludes.
What’s Behind the Succession Planning Slump?
The report suggests a few possible dynamics driving the overall decrease in effective succession planning.
As valuations increase, more advisors realize or assume that the next generation of leaders will be unable to afford to buy out the founders. Additionally, a growing number of RIA leaders are giving up on an internal transition, according to DeVoe. Consequently, they are making an active decision not to draft and implement a succession plan.
“This is shortsighted, as succession planning is not just about the economics, it is also about management transition,” the report warns. “The very presence of a succession plan will not only create a stronger future for the firm but will also increase the value of the RIA to most sophisticated buyers — regardless of whether next-gen can fully afford to buy out the founders.”
DeVoe’s report also suggests that the existence of a formal (and well-communicated) succession plan will spur higher employee retention and satisfaction.
Another driver of the decrease in succession planning is likely related to the steady increase in larger firms selling externally. Since they are more likely to have a succession plan, the high pace of sales at the top end of the market has depressed the average incidence of formal succession plans.
