The RIA industry seems to be in a sweet spot: Demand for financial advice and planning is growing while the number of advisors is shrinking, but firms are also facing many challenges.
Pressure on fees is increasing along with clients’ expectations for service, while costs for cybersecurity and other regulations are growing. And, possibly most important for small and midsize firms, less than 4% of roughly 18,000 RIA firms (or 687) control 60% of the wealth that advisors oversee. They currently manage $2.4 trillion, but there’s potential to manage trillions as wealth grows and is transferred to younger generations.
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“Competition over the next five years in a well-run, well-scaled RIA business will be a challenge,” said Shirl Penney, the founder, president and CEO of Dynasty Financial Partners, which provides integrated platform services for independent RIAs, many formed by breakaways. “If you don’t have a plan to be a billion dollars or more, you will be challenged.”
With that future in mind, Penney presented his top 10 list of best practices for RIA firms that want to excel over the next five years — his “Top 10 for the Next 5” — at Pershing’s RIA Symposium held in New York earlier this week.
1. Take inventory of the four areas that will determine the success of your business over time: a business plan, team of staffers, capital and timing – both professional and personal.
2. Own the culture. Align the “why” of the firm with the people that work in it and develop talent that has a full buy-in. “If you want to go fast, go alone; if you want to go far, go together,” said Penney. He recommends that advisors building up a firm surround themselves with “business partners/owners, not employees.”
3. Have the tough conversations. These include discussions with clients on pricing, with employees working in the wrong roles and with family so that they, too, buy in to the effort and time needed to build up the business. “Don’t over-hire” … keep a client advisory board” and “proactively solicit its feedback” and “relentlessly focus on clients.”
4. Work on the business, not just in the business. This applies to advisors as well as the CEO and includes having a long-term strategic plan — “play chess, not checkers” — a succession plan and a plan for professional development. “RIAs need to think about how to get better at getting better…. Try creative ways to scale.”
5. Ready your business for both organic and inorganic growth. Internally focus on a premium offering. Externally focus on your firm’s equity structure, compensation plan and operating agreements in order to attract new, talented advisors.
“A lot of firms talk about M&A but don’t have a plan to do it,” said Penney. They haven’t done an audit of their firm to know that they are prepared for a merger or acquisition, whose numbers are growing. There were 47 M&A transactions among RIAs in the first quarter, up 42% from a year ago, according to Penney.