The Four Steps to Achieving Organic Growth
If organic growth is critical for a healthy business, why do we spend so little time in this profession discussing how to achieve it? Maybe we’ve been doing too well to notice.
For an advisory firm, we define organic growth as the net change in assets from client flows, without respect to what happens in the markets or through M&A activity. Organic growth helps in driving revenue growth, allows advisory firms to reinvest in their businesses, makes them less dependent on what happens in the markets and provides a foundation for growth through acquisition.
But robust market performance may be veiling the organic growth advisory firms have actually been achieving. Fidelity’s RIA Benchmarking study shows that from 2010-2015, the compound annual growth rate (CAGR) for all firms that participated in the study was 14.8% in assets. That’s an impressive number, but after removing the significant market performance and M&A activity during that period, we’re left with an organic growth figure of a little more than half that amount (8.5%).
I believe the way to think about organic growth is all about managing the fuel level in your gas tank. You’re always needing to fuel the tank, but you're also always keeping the engine running. Thus, the level of fuel is always being depleted. To continue driving, you must have access to fuel for growth.
While the fuel added to the tank for this same group of RIAs was encouraging (16.5% in inflows), it’s also been depleted – with 8.0% of the firm’s assets walking out the door each year. Significant organic growth is difficult. You need to manage your fuel levels.
And it’s only likely to get more challenging. As Baby Boomer clients get deeper into their retirement years, they are going to be increasingly spending the assets they’ve entrusted to your care. At the same time, technology-based solutions will be ramping up the competition for new clients and current clients will be looking for more — of everything.
So how do advisors create organic growth? I believe it’s a four-part process that requires self-reflection, discipline and a little bit of science.
1. Winning with the right clients
Who are the right clients? Let’s start with the group that has been the bread and butter of your business – Baby Boomers. Boomers need your guidance in a critical way right now, and according to Deloitte in its 2015 article, “The Future of Wealth in the United States,” their assets will continue to grow through 2030. Couples on the brink of retirement need help constructing a withdrawal strategy, planning for healthcare costs, making sure they have enough money to last through their retirement, and hopefully leaving a financial legacy. And while it’s true that they will soon begin to draw down the assets you’ve been managing, it’s quite possible Baby Boomers will be clients of your firm for another 30 years with today’s longer life spans.
At the same time you are servicing your existing clients, now is the time to attract the HENRYs (High Earners Not Rich Yet). HENRYs have decades to go before retirement, are tech proficient and despite tremendous wealth potential, fewer than half are currently using an advisor. They can start making an impact on your business now – in their 2015 report, “The Fountain of Growth: Demographics and Wealth Management,” PriceMetrix reports that financial advisors who have a significant portion of clients under 45 grow an average of 14.1% a year, compared to a 7.7% annual growth rate for advisors who serve older clients, which makes the demographic segment of HENRYs an ideal target.
2. Rigorously managing your client value proposition
Once you’ve identified your key clients, you need to address your customer value proposition and manage it like a science. What is your specialization or your “unfair advantage” in the marketplace? We think of your customer value proposition as an equation that includes the firm’s range of services, plus the client experience, plus the company’s brand reputation (for the average advisor referrals drive 50% of new business) – divided by the price.
Firms that focus on developing a value proposition that resonates with their client base will potentially see stronger growth and spend less on marketing and acquisitions. Look at brands today that are succeeding not because of excessive advertising, but because of their broad recognition for a delightful client experience – Starbucks, Google, Amazon. Their client experience and reputation do far more for their brand than any advertisement could. This is the value proposition.
3. Segmenting your clients and trading in those who are not a fit
You understand what clients are “right” for you and you understand your customer value proposition. Now it’s time for action, and I believe segmentation is key. Segment your business by dividing your clients along two axes — potential and fit with your value proposition. For simplicity’s sake, let’s evaluate these segments like you might evaluate a car.
The “growth engines” for your firm are going to be those clients closest to where the two axes meet — high potential and high fit. You should focus your acquisition on these clients, and support and nurture these relationships as they will provide the highest lifetime value to your firm.
Then you have those you “keep riding” – the clients who are a good fit, but have limited growth potential. They drive cash flow to your business and help keep things going so you should keep these clients, but not necessarily put a lot of effort and cost into acquiring new ones.
Then you have the “repair shop” – the clients with potential, but limited fit for one reason or another. These are question marks and you want to try and repair the relationship or at least clarify it and move it to another quadrant.
And finally the litmus test – the “trade-ins.” Are you willing to let go of the bottom five to ten percent of your clients every year? Those with low fit and low potential? It’s hard to do, but over time it will help to grow your business.
4. Driving consistent advisor productivity
There’s another science that plays an important role in organic growth: the science of advisor productivity.
Currently there’s a huge dispersion of productivity within the advisory profession, even among advisors within firms. This is characteristic of a cottage industry run by artisans who haven’t consistently arrived at and leveraged best practices.
But there are proven drivers of productivity: specialization, being fee-based, working in teams, training, being planning-centric and deploying technology to serve your clients. These practices should be adopted and then deployed consistently.
In the future, we believe firms will have fewer, but more productive, advisors. As your advisors get more productive, you might consider offering lower-balance clients an automated offering, perhaps supported by a team of junior advisors who will create a virtuous circle of increasing productivity and help with eventual succession. These highly productive advisors will fuel your organic growth.
Achieving consistent organic growth will never be easy, but if you apply rigor and a little bit of science, you can achieve it. If you follow this kind of model you can potentially set up your firm for continuous improvement. Take the time to analyze your own fuel tank today: a future-ready business requires it.