Search for Talent Poses Greatest Challenge for Independent Advisors

Finding and keeping talent is the greatest challenge for registered investment advisors (RIAs), according to a survey by Advisor Growth Strategies. This hunt for the right people is fueling a record-setting mergers and acquisition (M&A) climate.

In its 2022 RIA Survey, Advisor Growth Strategies polled 101 independent firms to uncover their perspectives on business management and M&A. Below are some of the survey’s key findings:

• The hunt for talent outweighs all other challenges. For the third year in a row, RIAs listed “Finding Talent” as their biggest challenge, with 23% citing it as “very challenging,” and more than 50% of firms across every size segment describing it as “very challenging” or “challenging.” In years past, talent shared the spotlight with tech and growth as primary hurdles in the RIA industry. This year, RIAs are focused almost exclusively on talent, demonstrating the acute pressure of the current labor market.
• More RIAs are ready to deal. For the first time in its annual survey, Advisor Growth Strategies found that the percentage of buyers or sellers who were “not prepared” for M&A had decreased to 42%, from 53% in 2021 and 51% in 2020. More firms are willing to entertain conversations around deal-making, which is putting pressure on all participants to clarify how their firm will stand out from the competition.
• But they prefer internal succession. Seventy-seven percent of respondents have identified the next generation of owners they hope will succeed them. But a fifth of those have no plan for the transition itself, and the external pressure of soaring valuationscontinues to complicate internal succession. Only 30% of surveyed firms said they would completely rule out a sale. Forty percent said they would prefer to sell to a local partner, but an increasing number would consider an Acquisition Brand as their preferred partner.

The Hunt for Talent                

There are many reasons the hunt for talent is outweighing all other challenges faced by RIAs, noted Brandon Kawal, principal at Advisor Growth Strategies. First, Kawal pointed out, many RIAs don’t have a dedicated HR or talent-acquisition function.  The lack of resources, combined with an historically tight labor market, creates tension as RIAs try to meet their goals.

Acquisition Brands also create pressure as they enter new markets and introduce new services, Kawal added.  These acquisitive platforms have HR and talent-acquisition teams who are dedicated to hiring and recruiting.

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In addition, organic growth and unique capabilities require specialized talent, Kawal said. This is creating more challenges for RIAs because the addressable market is small. ”This is why acquiring talent through M&A has become so popular,” he said.

Attracting and Retaining Talent

To attract and retain talent, Kawal suggests that RIAs take the following steps:

• Prioritize talent acquisition through company promotion. “RIAs will need to ensure they have a strong story,” he said.  “Contributors, like end investors, have lots of choices right now.  Why are you different?” he asked.
• Commit to engaging talent through career development and compensation.  RIAs need career paths to ensure that contributors don’t get bored or disengaged.  Outlining the steps in a career and then incentivizing the result are fundamental.
• Consider long-term incentives.  RIAs should at least consider long-term incentives to retain key contributors.  “Long-term incentives could be equity, deferred compensation, or something similar that rewards sustained success,” he said.

The Effects of the Hunt for Talent

Kawal also explained why this search for talent is fueling a record-setting M&A climate among independent advisors and why firms are more willing to entertain conversations about deal-making than they were in the past.

First, he said, talent will define M&A moving forward.  “The talent conversation has become acute because the competitive dynamics of the RIA space have evolved–the definition of “big” has changed from $1B AUM to $50B+.  More talent is needed to deliver on the strategy,” he said.

Also, M&A is creating a venue to engage multiple professionals with specialized toolkits.  M&A and recruiting have become complementary strategies for Acquisition Brands to expand their size and reach.

Finally, firms are more willing to entertain conversations about deal-making for a few reasons: increased valuations, succession needs, and multi-generational growth.  “We can’t ignore that this has been an excellent time to do a transaction, but sophisticated acquirers have also built significant resources that help the next generation grow and succeed in their careers,” he said.

The findings of the Advisor Growth Strategies 2022 Survey, along with other studies, are available here.

Ayo Mseka has more than 30 years of experience reporting on the financial-services industry. She formerly served as Editor-In-Chief of NAIFA’s Advisor Today magazine. Contact her at amseka@INNfeedback.com.

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