The vast majority of RIAs are not ready for growth through mergers and acquisitions, which is helping big firms grow more rapidly, said Dynasty Financial Partners CEO Shirl Penney.

Advisors usually lack the capital, infrastructure and mindset to  supercharge their growth inorganically, Penney, a former top executive at Citi Smith Barney, told an audience of advisors last week at the Schwab IMPACT conference in San Diego.

“There are a whole host of things you want to make sure you can do to put yourself in the best position,” said Penney. “Then you get into a rhythm. Firms become a machine on M&A, and they’re growing like this in large part because they already have the organic piece cruising along and they want to figure out how to get into a system on the inorganic front as well.”

To be successful engines of inorganic growth, advisors should have a well-established brand identity, possibly including a niche, said Penney.

Firms should also have a well-conceived technology stack in place, said Penney. “We need to get it right across the organization so you don’t have to hire up as you grow. That’s where you can really get scale into your business.”

Many of the day-to-day operations of the firm should be automated, said Penney, and client portals and applications should enable clients’ digital experience to move across platforms and devices.

They should also have an understanding of how firms are valued and how deals are funded, he said.

For those thinking about mergers and acquisitions, it’s hard to tell whether today is the optimal time to sell or acquire a firm, said Penney.

“None of us know what inning we’re in in terms of the capital markets,” he said. “We can all agree we’re not in the second or third inning.”

But Penney noted that capital markets in the U.S. have recently entered record territory for growth on a month-on-month basis and the rally might be “a little long in the tooth.”

While growth may be slowing, RIA profit margins are still healthy, said Penney, adding advisors don’t experience much pressure to lower fees, but they are adding services and increasing the costs of serving their clients.

Some of the best run firms in Dynasty's network have enthusiastically embraced outsourcing, he said.

“They’re constantly asking themselves ‘what’s my secret sauce?’ and whatever that secret sauce is, whatever is differentiated, that’s what they’re going to invest in,” said Penney. “Anything else that’s taking up their time, they’re going to outsource it.”

Dynasty partners spend about 13.6% of their firm’s revenue on payroll, while the industry as a whole spends 24.4% of their revenue on payroll, he noted.

“They happen to be growing faster, too, but that’s not too difficult to understand: They have time to grow,” said Penney.

Synthetic or not, there’s no substitute for scale, and that’s something Dynasty has at its disposal. Penney’s network has grown to 47 partner firms of various sizes, the largest currently at more than $7 billion AUM, encompassing $40 billion in client assets.

Penney cited Cerulli Assoiates research that showed that there are now over 687 RIAs with more than $1 billion AUM. “If you extrapolate from that, less than 4% of all RIAs now control north of 60% of the assets. They’re not slowing. Those numbers are just getting more and more acute.”

“Size and scale matter a lot in our industry, and we don’t all fully appreciate how much,” said Penney. “You have to really understand what’s happening from a competitive dynamic perspective. It’s not 10 years ago, when you could talk about the fiduciary advantages of your model. Going forward, your largest competitors are going to be large regional firms.

“The top 20% of RIAs as defined, those north of $500 million AUM, are growing four times faster. The reason is that they’re closing more prospects and growing by adding twice as many new clients—and those clients are twice as large.”

More simply, larger firms have more time to think about growth, said Penney, who cited a survey showing that RIAs spend 52% of their time on client-related activities and 30% on middle- or back-office activities. A much smaller amount, 14%, is spent on portfolio management.

The average RIA is left with little time for professional development, said Penney, which will hurt their ability to remain competitive.

“How are you going to sharpen the blade and stay on the cutting edge of what clients really value? In terms of growth, there’s no time left to focus on the growth of the business because of the increased needs of clients,” said Penney. “Thus, your larger brethren are growing at a much faster rate.”