Why Organic Growth Is the Right Path for Many ­Advisory Firms

After receiving several emails about my ThinkAdvisor.com Jan. 31 blog “Mastering Organic Growth,” focused on growing independent advisory firms from the inside out, I’ve concluded that many owner advisors don’t fully grasp what “organic growth” is or whether it’s right for them.

This confusion also appears in the health food industry, from which the terms “organic” and “inorganic” were co-opted, so it’s no surprise they get muddled in the advisory business.

Therefore, before we get to the implications organic growth has on independent firms, let’s be clear on our definitions. In the advisory industry the terms “organic growth” and “inorganic growth” apply to the sources of a firm’s growth.

Thus, inorganic growth is growth that comes from outside a firm: by acquiring or merging with another firm or business. In contrast, organic growth means growing from within: simply doing what you’ve been doing — only better and faster.

While either strategy can be successful, I’ve found that “organic” growth from within is usually less costly, less risky and has a much better chance of success. It’s also the better solution.

Before getting into the details of how and why organic growth is better, I’d like to note that I’ve left marketing out of the conversation. Although many people believe the key to business growth is marketing, in my experience, the success or failure of any marketing plan depends on what you’re selling, and that’s what organic growth is most focused on.

Organic growth is about running your business — but doing it better. Perhaps that’s not as exciting as buying another firm, adding a new service or reaching out to a new group of clients. Once you get your firm in better shape, though, you will be stronger to venture into some, or all, of those areas.

As I noted in my forementioned blog: “Using your existing client base to uncover opportunities also helps grow the business organically. When you look at all areas that can be considered business assets (i.e., current clients and employees), they are the most valuable. Consider enhancing the service model you already have and creating a new story to tell. I’m not suggesting that you add a new service model — just revamp the one you have.”

Reality Check Until you get your business running smoothly by doing what you currently do as best as you can, don’t even think about adding something else to the equation. Instead, give yourself a reality check: What do you really want your business to be, and what are you truly trying to accomplish?

Also, do you want to work with a lot of clients at relatively low fees, or a smaller number of clients paying higher fees? Great firms can do both — eventually. But if you’re a relatively young firm or an older firm that seems to be stagnating, you’ll do better to focus on one or the other and provide the best services you can. Once you’ve mastered these services, then you can think about expanding into the other end of the spectrum.

It doesn’t matter which services you choose. What does matter is to decide on your “core business” — and stick to it. To determine your core business, look at your profit and loss statement. The service that’s generating the highest revenues is your core business. Your job is to make this area better.

Again, it’s a mistake to add more services rather than to increase your focus on core service(s) first. Improving your core services and providing them to more clients is the fastest and easiest way for most firms to grow.

If your core service isn’t what you want your business to be built on, you’ll need to gradually transition your focus onto the service you want to grow. The key word here is gradually. The mistake that many smaller firms make is changing gears too quickly.

Focusing on new core services is not a task to be taken lightly. Go slow, making sure your clients and your staff are making the transition in a timely manner.

Realigning Culture To determine the kind of growth you want, ask yourself: What am I growing for? Inorganic growth is harder to achieve, because it requires someone else agreeing to let you buy what they have. While it’s true that mergers and acquisitions in the advisory industry are booming, there are a lot of big players in this space. This is good news for sellers but not really for buyers.