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DeVoe: Why Growth Is So Important for RIA Firms

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What You Need to Know

  • Growth, whether it's organic or through M&As, is crucial to RIA firms, David DeVoe says.
  • It helps not only the firm, but also its advisors, other staff and clients, he argues.
  • Succession planning is just as important as growth planning, but many RIAs still don't have a succession plan in place.

Growth, whether organically or through mergers and acquisitions, is crucial for RIA firms, and it’s not only good for its owners but also its advisors and other staff, as well as its clients, according to David DeVoe, CEO and founder of the RIA consulting firm DeVoe & Co.

Since the start of the pandemic, RIAs have been “doing a much better job than other parts of the industry,” including hybrid RIAs and wirehouses, he said at the recent EDGE conference in Hollywood, Florida, in an organic growth workshop.

RIAs had historically grown faster after a crisis “because they take care of their clients better than any model out there,” he explained. “And once that crisis is over,” those clients will talk with their family and friends and say how their advisor helped them, and at least some of those they speak to will realize their wirehouse rep didn’t do such a great job of helping them, he noted.

That leads to more referrals, and “more than 40% of growth comes from client referrals,” he pointed out. “So during a crisis where RIAs really shine, we’ve typically seen an uncoiling spring after that,” he said. Although that hasn’t happened quite yet, he told attendees: “I’d like to think that the spring will actually uncoil next year.”

Based on what he’s seen so far, DeVoe said the “good news is 72% of advisors will say that their growth is higher” than it was a year ago.

The Why

So why is growth so important for an RIA firm? For one thing, its “valuation will increase, but there’s a variety of other elements as well,” according to DeVoe. A company that is growing is also “really in a position to improve what your company does,” he said.

He explained: “As you achieve your scale specialization, as you get bigger, you can add more services or capabilities or even products, you can get into deeper financial planning or alternative investments [and] a whole variety of things.”

A growing RIA has to put more processes in place, but it’s “becoming a more industrial-strength company, and you mitigate a lot of risk for the company,” he said.

“So it’s really good for the company,” he said. But he added: “It’s also good for your clients [because] the bigger you get, the better you’re able to serve clients. You have more and more staff, junior and senior. You can tailor your services more. You can be more responsive to what their needs are. And … you can have a greater set of products and capabilities that you can offer them.”

The growth also helps advisors and other staff at the firm, he went on to say.

First off, he asked rhetorically: “If you’re an employee in an organization that’s flat or not growing, what’s happening to your career path? It’s staggering, right? A faster-growing firm will create better career paths.”

The How

There are only a small number of ways in which an RIA firm can grow, DeVoe said.

They are market performance, adding new clients, asset movement among existing clients, M&As, and one-off events that raise added capital, he said.

Noting that his firm consults on many M&A transactions valued between $250 million and $3 billion, DeVoe pointed out that all too often, while “we’re working with a seller, they get pretty far down field and you had a transaction and they start thinking” about how their staffs will respond.

RIA firm owners are often worried about what the impact will be on their advisors and other staff. But DeVoe tells them the transaction is going to be great for their staff, he noted. For one thing, by joining a bigger firm that’s growing faster, their career paths will become better and the “compensation picture is better” as well, he said.

Especially now, amid the Great Resignation in which many people are leaving their firm or looking to do so, he said breaking the news of an acquisition to advisors and other staff in the right way is crucial.

One thing to avoid is presenting them with nine or 10 bullet points on how the transaction will help them, he said. As long as you have figured out why it’s important for the firm to grow, “you’re in a position to talk to your staff and get them to engage [and] your rationale for growth really needs to support your company purpose,” he noted.

If the owner of an RIA firm just dwells on the growth in and of itself, he warned that their engagement level may not be very high. It’s much smarter to say something like: “Hey, you know what? We’re doing something really, really good for the U.S. investors overall. … We’re taking care of our friends to help them manage their money better. And frankly, this is a good thing.”

Succession

Noting that he’s done “a lot of succession work over the last 19 years, working with advisors to try to put these succession plans in place,” DeVoe said the industry is, however, still “failing in that regard [and] 30% of advisors are challenged putting succession plans in place.”

What DeVoe determined is that many RIA owners “just get overwhelmed by the complexity” of a succession plan, he said. The focus is often on the client list, website and social media presence, “Pretty soon, you get overwhelmed and you’re like, ‘wow, where do I even get started with this?’” he said.

What is needed is a methodical approach to “start thinking through this, to get started [and] to start putting action in place,” he said, adding: “Your goal is to have [a] comprehensive, integrated plan. This is how you drive long-term growth for your organization.”

DeVoe also advised RIA firm owners to evaluate their companies before creating a plan and “focus on your weaknesses first,” especially those things that he said may be “constraining your ability to capitalize on the things that you’re good at.”

It’s also important to make sure that an organization’s plan has “foundational elements” in place, warning that without “certain underpinnings … the entire structure will collapse as you build it.”

Other important pieces of the puzzle, he said: Figuring out what kind of clients your company and its advisors have and want to be focused on, and narrowing down the services that it specializes in.

(Pictured: David DeVoe, CEO and founder of DeVoe & Co. Photo by Jeff Berman)