In today’s world full of distractions, it is easy to lose focus—and more importantly, to lose focus on what really matters in your business. I’m not going to discuss how social media and the need for immediacy plays into this problem.
It’s hard to blame anyone for being confused about how to run their financial practice or firm in the face of constant pressure to keep up with “robo” advisors and mega growth from firms like Schwab and Vanguard, all of which can compress management fees. Add to that this little thing called the “DOL fiduciary rule,” which has the potential to change the industry forever. But in the end, frankly, worrying about all of this outside noise makes you lose sight of what really matters in growing your practice or firm.
Whether or not we all think about it academically, there really are only five major ways to grow a financial services firm:
1) market performance
2) increase share of wallet from current clients
3) obtain new clients
4) expand services to enhance revenue
5) lower redemption rates
I’m fortunate to have the opportunity to talk to many great advisors in the course of my job responsibilities, and I try to observe common themes. Several growth triggers appear obvious when viewing a large sample size, and other factors make me question whether or not they have any impact on the growth of a practice or firm at all.
The most obvious one is market performance.
Most firms spend so much time focused on it because their overall value proposition is to outperform benchmarks, but the impact this has on the growth of their business is actually quite small. When we looked at the growth of more than 10,000 advisors on the Envestnet platform from 2012-2014, market performance was a relatively minor component of overall growth.
If the total growth of a firm or practice during that time period was 100%, market performance as a component of that total growth only represented 6%.
Another operating principle that has intrigued me is how a firm views spending time with current clients. There are two schools of thought, and I hear them both almost on a weekly basis.
One advisor told me last week: “I love my clients, but once they’ve been with me for two years, their needs are pretty simple. I try not to over-service them because they are happy, and I should be spending time finding new ones.” There’s also the more typical view: “I really service my clients well, and spend a lot of time with them because it will lead to referrals, and I’ll lose fewer clients.”
I’m in the first camp, but I wanted to test the theory of the second.
You might think that top firms have higher growth in share of wallet and lower redemption rates. But the data we reviewed from our platform showed quite the opposite. Advisors with the top 10% of growth had very similar wallet share growth numbers from existing clients, and actually had redemption rates that were 1% higher than the overall average.
This tells me that the amount of time spent with current clients doesn’t impact firm growth as much as many assume.
What does have an impact is the rapid growth in new clients. Advisors with the top 10% of growth on our platform blew away the overall average in new client assets—they consistently brought them in at a rate of five times the overall average.
Our platform data analysis reveals three things about the nature of successful advisory firms’ growth:
1) achieving market outperformance is a laudable goal, but it doesn’t directly impact firm growth in a significant way
2) neither does over-servicing existing clients; and
3) the highest amount of growth comes from seeking and acquiring new clients, which carry little downside risk to maintaining an existing client base.
In an increasingly competitive and complex industry, successful advisors who cut out the noise and stay focused on growth through the addition of new clients will be rewarded.
See Jay Hummel’s previous blog post, Yes, Investment-Vehicle Selection Affects Firm Growth