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ThinkAdvisor
Angie Herbers, advisory firm consultant and columnist

Practice Management > Building Your Business

Why Isn't Your Firm Growing? The Hard Truth Is Right in Front of You

By Angie Herbers

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What You Need to Know

  • When the leader of a firm wants to set new goals for growth, like client acquisition or hiring, the P&L is the place to start.
  • Before firms attempt to maximize their growth rate, it's critical they get staffing in line with their actual growth rate.
  • If you’re not getting at least one referral for every $500 you spend on client appreciation, you need to reevaluate your spending.

Financial advice firms that want to grow have an unflinchingly honest mirror: the profit and loss statement. My consulting firm has studied thousands of P&Ls over two decades of consulting. Today, I can look at one and quickly understand the goals of the business. 

At times, the leaders of these firms tell me something different than what the P&L is telling me. In such situations, the first issue we need to resolve is the misalignment between how money is being spent and what the firm’s true goal is. In other words, when the leader of a firm wants to set new goals for growth, like client acquisition or hiring, the P&L is the place to start. 

This column will address several key areas to look at to help determine if what you’re spending the firm’s resources on is consistent with your growth goals. First, it’s important to identify the issues that can be deceptive. Once they’re identified, they also must be addressed. For many firms, step one is cleaning up the P&L so the information being used is up to date, accurate and unbiased. 

Drill Down Into Your Data

When firm leaders look at a P&L, they’re looking at numbers from the past. If the goal is for future numbers to show higher revenue growth, greater profits, etc., they must first decide what numbers to look at that will produce the desired change. 

Advisory firms often want to improve their future performance and will regularly tell me they want their growth rate or profit margin to be a certain number, their staff compensation to be this figure or that and their spending on marketing — according to a benchmarking study they’ve just seen — to be at a certain level. In other words, they believe they should adjust their P&L to align with industry benchmarks. 

Instead, it’s best to step back and look at the problem differently. What’s the return on investment for what you are spending today and is it working? 

I’ve seen firms spend significantly less on marketing than the latest benchmarking standards but grow at levels that top the average benchmark. Additionally, I’ve seen firms with both lower staffing costs and significantly higher growth rates than the benchmark. The point is, the benchmarks you set for your firm should reflect the unique goals of your individual firm — not the industry averages.

When using your P&L as a business guide, the goal should be for the owner or owners to honestly evaluate how they’re spending resources to achieve their goals. If these expenditures are not producing the desired results, course corrections need to happen. 

Survey Staffing Expenses

This leads us to the matter of overall staffing costs. Is your business overstaffed, understaffed or staffed just right? The majority of advisory firms are overstaffed. 

Why is this the case? Because their leaders make staffing decisions based on projected growth, or more accurately, on the growth they aspire to. If these firms’ current growth rate is 10%, they’re hiring as though the growth rate is 20%, for example, without the capital to back it up in a sustainable way. 

What ends up happening in such cases is that a firm will end up with a combination of too much staff, inadequate results and growth that’s not at a level that can correct this imbalance. Before firms attempt to maximize their growth rate, it’s critical they get staffing in line with their actual growth rate. (Most advisory firms today are not backed by a serious pool of private capital; if you’re not, the goal is to ensure that staffing costs increase at the rate of your overall business growth.) 

Carefully Review Marketing Budgets

It’s also important to look at marketing costs. When staffing costs get too high, often we see advisory firms double down on marketing efforts to keep their staff busy. When looking at your P&L, it’s important to compartmentalize client appreciation and direct marketing. These costs are broken out in most firms’ P&Ls via both a client appreciation chart of account and a marketing chart of account. 

What we’re looking for is information about whether the money being spent in these two areas is producing an acceptable return on investment. To determine that, you can use some long-term industry averages to evaluate how you’re doing.

For example, the average amount a firm needs to spend on client appreciation to earn a quality referral is $500. Thus, if you spend $20,000 on client events, newsletters and other client-appreciation efforts, you should expect to reap 40 referrals.

As your firm grows, the cost of a referral should fall due to the economies of scale. Over time, it might drop to $400, $200 or even $100 per referral. But the goal is to be earning an acceptable return on your investment today. 

If you’re not getting at least one referral for every $500 you spend on client appreciation, you need to reevaluate how you’re spending the money and identify what needs to change. If you’re spending less than $500 per year per referral, do more of what’s working.

In direct marketing, the average cost to generate a good lead is $2,000. This is your initial ROI target. Again, the cost of a lead should drop over time, as your firm figures out the most effective forms of marketing, for instance. 

If you have a yearly marketing budget of, say, $100,000, then it would be reasonable that you’d gain 50 new prospects over 12 months. If you don’t, something’s wrong with your marketing strategy. If you do get this level of prospects or higher, then the goal should be to do more of what you’re doing successfully in order to gain even more leads.

Studying your firm’s P&L — starting with staffing, client appreciation work and direct marketing — can be a great way to get growth moving for your firm. But you must be willing to heed what this review tells you about your business. If you do the work that’s needed to improve growth, your profit margins should follow. 

Angie Herbers

@AngieHerbers

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