Dynasty President and CEO Shirl Penney

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.

(Related: Advisors Need Critical Mass to Thrive)

“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.

6. Establish your brand DNA and create a consistent client experience. RIA firms need to ask where their brand is now and where they want to be in the next five years. They should take stock of their brand strategy and architecture, client relationships with their brand and digital marketing.

Penney showed a digital marketing pitch from a firm using the Dynasty platform cost just $600 to create but attracted 900 clicks, 15 meetings with prospects, seven new clients and $21 million in new assets.

7. Tech-enable all aspects of your business. These include compliance, operations, investments, finance, marketing and client experience. Revenues are twice as high for firms with advanced technology integration, according to Penney.

Citing an Aite/Envestnet white paper, Penney noted the three issues RIAs have with technology: an inability to use technology to its full capacity, inadequate integration and an inability to customize technology to their needs, which would explain the first issue.

He said investors want RIAs to be more like the apps they use regularly such as NetFlix, Uber and OpenTable. “Next generation strategies must include customized digital solutions.”

8. Enhance your digital client experience. This includes allowing clients to access their accounts across all digital devices, store important documents in a virtual vault and gather data. “We spend four hour a day on the mobile devices,” said Penney. “If you’re not on the phone for your clients you run the risk of them leaving for another provider.”

9. Access the best-in-class solutions for all of your clients’ needs. These include investments (capital markets and alternatives), loans and banking. “You should not lose clients to Goldman’s private wealth group,” Penney said. He described this multiple services and offerings as the “triangulation of advice.“

10. In-source the special sauce; outsource the rest. “The best firms are laser-focused,” said Penney. They capitalize on what they do best and outsource most of everything else, which keeps costs down. The average partner firm in Dynasty’s network has 65% gross revenues (and net revenues of 25% after advisor compensation), 19% in variable costs and 16% in fixed costs for real estate and staff. “The biggest killer of P&Ls is overstaffing,” Penney says.

Firms must also invest in leadership, Penney said. This includes mentorship and board of directors, a community of like peers and outside industry perspective. “Find a peer set you aspire to.”

Penney ended his presentation quoting the Navy SEAL motto: “there are no bad teams, only bad leaders.”

— Check out Dynasty Rolls Out Team to Aid $1B-Plus RIAs on ThinkAdvisor.