Organic Growth, The Future
The organic growth rate for RIAs fell from 4.8% in 2019 to 3.4% in 2022. The future is coming fast, and most advisors are slowing down the rate at which they attract and expand client relationships.
This is something to take seriously if you care about the value of your enterprise.
This piece from InvestmentNews was just one of many that present this trend of declining organic growth rates. I’m not sure how big of a decline to expect going forward. But advisors have a few things going against them right now.
First, increasing competition from fintechs will put pressure on growth rates. There are some really cool, direct-to-consumer platforms that are super compelling for the next generation of validators.
Second, advisors have never really had to market. Boomer advisors grew up in an era where opening your door led to new clients. Those advisors have full clienteles and great incomes. A declining income that was already great isn’t super painful.
Third, the modern consumer wants something completely different than what they have been offered. Historically, advisors have delivered an industrial-age, top-down plan. The modern consumer is asking for something very different than their parents.
Perhaps some of you are already familiar with this challenge and have remedied the solution. I’d like to offer you just a few tips that have helped me diagnose and begin to treat this challenge within my own RIA.
Organic growth is measured, generally, either by percent increase in AUM, or percent increase in new clients. Of course, more than just income and profit, organic growth is a critical indicator of a sustainable business model and a healthy industry.
While the observed decline in organic growth could be alarming, it also presents an opportunity for those firms that are organized properly to take advantage of the pressure. Let’s start with just three things to do:
Step 1 - Track it. What is your organic growth rate? Start tracking it. Most RIA firms don’t know where they stand because they don’t track their growth, or know where to get started. For now, simply measure the net increase (or decrease) in new clients and also the net increase in new revenue however you can get it. Just plop it in a spreadsheet, or on a piece of paper. In your leadership meetings (which I recommend having each week) you should be measuring and reviewing these KPIs, along with any other leading indicators or departmental indicators you design. Make sure as you do this that you don’t just look at gross revenue. If you’re billing on AUM, you need to remove market movement from your calculation and make sure you’re zeroing in on the right number.
Step 2 - New channel. Brainstorm how you are going to attract new revenue and new types of customers. Not just new clients, but new demographics (younger, and different). It’s really easy to get complacent and assume that what was working in the past is going to work in the future. The next generation of clients is looking for a different experience, more information, more nurturing, and in some cases a new business model. The next generation of consumers appears to be much less willing to pay the same price for the traditional experience. There are new customer archetypes and new products and services coming into the market regularly. Cash payments, transactional revenue, or AUM fees all seem to still be desirable for various segments of consumers. Find something adjacent to where you’re already at, and begin leaning into some new channel of growth.
Step 3 - Increase your spend. It might feel like saving money inside of your 401k is better than putting your hard-earned dollars towards an unproven marketing program. But in my experience, I’ve found that once I dialed in all of my numbers and understood my business well, it became a rather safe place to invest money. I would add up all of your marketing spend, and divide it by your gross revenues (partial salaries, full salaries, brand, demand gen, and even your time spent on said activities). Figure out what percentage you are spending this year, and spend 2%+ more next year. For benchmarks, I’d suggest 10%+ would reflect a strong commitment to marketing. I’ve historically spent closer to 15%.
In conclusion, advisors who are interested in growing their enterprise value must take the declining organic growth rates for RIAs seriously and adapt to the changing landscape. Increased competition from fintechs and evolving consumer expectations require a proactive approach. Start by tracking your organic growth rate and monitoring essential KPIs. Identify new revenue channels and demographics to attract. Make sure you allocate a portion of your revenue towards marketing and growth initiatives. By staying agile and investing in future growth, advisors can position their firms for long-term success and drive profits to improve client experience and service over time.