If you lead a financial advisory business, you know there are plenty of coaching articles, podcasts and videos out there pertaining to practice management. In fact, “plenty” is putting it mildly. When I started writing about practice management in 2005, I could count my peers on one hand. Today, those of us who provide guidance and perspective for advisors likely number in the thousands.
The abundance of high-quality content presents advisory firm leaders with an obvious challenge: narrowing down what’s relevant and impactful. It’s not enough to focus on “how to maximize your growth.” Achieving a firm’s growth potential is the topic of most of the advisor-coaching content out there. To understand what is most worthwhile for you, you must first take a dive deep into your numbers and define your own growth targets.
Unfortunately, many advisory firms struggle with establishing a realistic growth strategy. One of the major issues is if you don’t have an existing plan or strategy to help guide you, it’s hard to filter all the information, data, benchmarks, advice, articles, etc. thrown at you. So, let’s take a look at how you can filter what applies to you and what doesn’t.
Developing a Growth Strategy
The first step is to figure out how much you want to grow and what are reasonable numbers to use for projecting your own growth. Let’s say you are a multibillion-dollar-assets-under-management firm. Your company would anticipate that market appreciation alone will increase AUM between 4% and 5%. That’s the 20-year historical average across the industry. If your business serves more retirees than accumulators, the average AUM increase might be lower than that average. If it serves more accumulators than retirees, the average might be higher. But overall, 4% to 5% has proved to be a good starting assumption for most firms.
The next target is the total number of desired annual leads—the number of people who reach out to learn about your services. Let’s say you know your firm gets 60% of its leads from referrals and 40% from direct marketing. That breakdown is a good one to emulate: The 60% number indicates the firm’s client service level is strong. Great client experience is the key to generating referrals and is the most cost-effective way to create quality leads. Many firms make the mistake of trying to generate 100% of their new leads from marketing efforts. That can indicate they’re not sufficiently focused on client service quality and don’t recognize its potential as a source of low-cost, high-quality leads.
When Herbers and Company sees client referrals account for less than 60% of leads, we advise firms to cut back on the investment in marketing and focus instead on investing in client services processes. Often, the required investment is less than marketing acquisition costs, and it’s more effective and sustainable.
So, what exactly is the cost of marketing for client acquisition? Numerous studies tell us that the cost of adding a client through marketing ranges from nothing to upwards of $5,000. Our experience suggests that $2,000 per marketing lead is a good rule of thumb. Calculating the cost of the desired number of leads from marketing is straightforward: If you want, 150 leads per year from marketing multiplied by $2,000, that means your marketing budget would be equal to $300,000.
That price tag should help to illustrate the value of referrals from existing clients. While keeping existing clients happy though good client service costs money, it’s less expensive than relying 100% on leads. What’s more, marketing costs often get out of control because many firms fail to set boundaries and expectations around marketing spends.
Then we get to close ratios, the driver of all growth: If you can't close then the money spent to create leads through marketing is simply wasted. Converting seven of every 10 leads is a reasonable goal. Many of our clients have higher rates, but 70% is a good initial target and can be adjusted over the years based on results. Building on our example above, a 70% close ratio on 300 leads translates into 210 new clients.
Then finally, in creating a growth framework, it’s also necessary to determine the average fee generated per new client. To track it, divide the firm’s total annual revenue by the number of clients. Let’s say, your average client generates $8,900 per year. Multiplied by the number of new clients the firm anticipates gaining from above, we can see that new clients would amount to more than $1.8 million in net new revenue for the period.
Putting It All Together
These formulas, applied to existing and new clients, allow us to target annual revenues. And as firms log quarter-by-quarter numbers, they can track progress and determine how realistic or unrealistic their growth targets are. They can then adjust accordingly. And whether firms meet, exceed or fall short of their targets, they’re gaining truly useful benchmarking information for their business in the future.
When a firm records and tracks its investments and progress toward its own growth objectives, it will soon have trends that provide a clear picture: of what it’s capable of achieving, of whether it needs to increase its focus on referrals and client service, and of whether it should decrease or increase its marketing budget to achieve its objectives.
Using the growth framework approach described in this article won’t guarantee your firm will grow to its potential; many other factors certainly come into play. But it’s rare to find a firm that grows strongly and consistently without one.
Once your business has developed its unique growth framework, it will be more evident which article, podcast or video is worth your time based specifically on what you’re trying to accomplish. If you’re still working on building your referral rates, for instance, or if you’re ready to invest in more marketing, you’ll filter in relevant content accordingly. Growth frameworks allow you to use your finite time and energy most effectively, and the ability to effectively filter practice management content is just one example.
Angie Herbers is the founder and CEO of Herbers & Co, a consultancy firm for financial advisors.