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5 characteristics of growth-restrained RIAs

Common problems impeding RIAs' ability to expand, and how to correct them.

Jun 11, 2018 @ 3:10 pm

By Shirl Penney

With competition for assets intensifying across the registered investment adviser marketplace, CEOs of successful RIAs are increasingly focused on aggressive growth strategies to bolster their competitive advantage and add significant value to their businesses.

RIAs that are struggling to compete, and are at risk of losing market share, frequently exhibit one or more of the following characteristics that are impeding their ability to grow. These issues are largely interrelated, but luckily, each can be corrected. The sooner they are ameliorated, the sooner a growth-restrained RIA can unlock its potential and drive toward a successful future over the next five years.

1. Leadership bogged down by administrative duties and can't find time for growth. Growth takes focus. It takes a strategy. Above all else, it takes time — time many RIA CEOs say they don't have.

Those same CEOs say they have never been busier, and yet they are not achieving growth. They suffer from low ROT — return on time. Meanwhile, CEOs driving exponential growth are marked by having a high ROT. They spend the same amount of time working on the business as they do working in the business.

Finding the time to grow starts with building an organization designed to grow — known as the "freedom-to-grow" organizational model. This model takes the time-consuming, day-to-day administrative burden off the firm's best sources of growth — most often the CEO and senior partners — and gives them the freedom and leverage to accelerate the firm's growth and value. At the same time, it eliminates poorly defined roles and responsibilities, which are the scourge of any business.

When roles and responsibilities are nebulous, it leads to duplicated effort, incomplete and disjointed work output, constant disappointments and missed opportunities. Firms plagued with ill-defined roles are marked by the "I'll do it myself" syndrome that can consume a CEO's time.

2. Unclear growth expectations. Growth cannot be a passive desire; it must be an ethos. There's wanting to grow, and then there's planning to grow. Wanting to grow often manifests itself as a gut feeling that keeps CEOs up at night, wondering why growth isn't happening as it used to.

Chances are that growing was much easier when they started out because it was their sole focus. Many RIA CEOs expect growth will simply continue, but growth plateaus after the new-business honeymoon period. Growth has to be nurtured, it has to be strategic and it takes time. The ability to set and achieve realistic expectations — and measurable ROI — is another benefit of a freedom-to-grow organizational structure.

3. Overstaffing to address problems. All too often, as a result of a lack of time, expertise or both, RIAs will add staff to treat the symptoms of a problem instead of identifying the root cause of the problem. Adding staff may seem like a quick fix, but it creates significant additional expense. It can also knock an organizational structure out of whack and fuel staff conflicts over confusion of roles and responsibilities. Thus, it is often the wrong fix.

Having the right team of problem-solvers with the right talent in the right roles — either internally or on an outsourced basis — can prevent overstaffing while quickly eliminating problems. In this way, RIA CEOs can gain leverage from their team, avoid micromanagement (remember ROT) and enhance both profitability and productivity on the road to growth. Nearly 80% of RIAs we meet are overstaffed, thus hurting margins and taking more of leadership's time to manage. Having the courage and discipline to address and make personnel changes when they are needed are important qualities for a CEO to have. Firms that focus relentlessly on rightsizing and upgrading talent and having the right people in the right roles will win disproportionately.

(More: The biggest obstacles to building a billion-dollar RIA)

4. Lack of business planning. Many of the most successful RIA CEOs did not intend to be CEOs when they started their careers. They intended to build a sound practice around providing financial advice. Only when they discovered the benefits of the independent space did many take their destinies into their own hands and start their RIA.

Overnight, these exceptional financial advisers became CEOs and were expected to act the part. With so much responsibility and so many details to tend to, many started their companies without taking the time to craft meaningful business plans. As they grew by seizing opportunities that came their way, the plan never became a priority. Interestingly, while these advisers regularly proclaimed to prospects and clients the value and necessity of having a financial plan to set their goals, they often didn't take their own advice to create a business plan and review and update it regularly once they were CEOs. Only once growth has stalled does the lack of a plan become a major regret.

The good news is that it's never too late to create a business plan. However, the sooner the better, especially if the goal is sustained growth. Having a business plan in place to work across the freedom-to-grow organization is a catalyst for building additional value into the RIA. The very best firms also have economic models that show them a road map to follow that's based not on time, but on scale, so they are able to make decisions on staffing, service offerings and business expansion over time in a thoughtful and structured way, versus the typical random approach.

5. Not using equity as an incentive. Equity is one of countless reasons to operate in the independent space, but who gets it? The founding members of the RIA took the risks — they deserve the rewards, right? If that means hoarding equity and not using it as an incentive to drive growth — particularly as an element of the firm's inorganic growth strategy or succession plan — then no; it's short-sighted and can actually reduce the RIA's overall value.

Equity is ownership, and ownership inspires the right talent to achieve extraordinary results. It is the incentive that aligns priorities and growth strategies. Providing the top talent in the firm with the ability to earn equity ownership over time, or using equity to recruit top, growth-focused talent, will ultimately create more value for the RIA. In this way, everyone wins. Conversely, not using equity to retain top talent creates a flight risk among those exceptional individuals who may see the allure of more aggressive, growth-oriented RIAs that are willing to offer ownership. It is important to understand that using equity as an incentive can be achieved without giving up control.

If any of these characteristics sound familiar, then the question should be: How does the growth-constrained RIA start to eliminate these impediments to growth? The answer: by building the freedom-to-grow organizational structure first.

If that's done with discipline, the remaining issues will correct themselves in the process. Those CEOs that start early and take the growth and future of their firm into their own hands — that will drive the necessary changes in the professionalization of their firms — will be best positioned to grow and win over the next five years.

Shirl Penney is the founder, president and CEO of Dynasty Financial Partners.

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