Our industry is fascinated by inorganic growth. M&A news stories, studies and conferences have all kept the industry abuzz for years now. And it’s easy to understand why: The combination of two firms is a big, clear-cut event that instantly creates a bigger company.
By comparison, organic growth can be a bit like watching grass grow. You certainly won’t find many stories in the media about advisory firms earning new client referrals or deepening their relationships with existing clients. But in recent months, Herbers & Co. has seen more and more firms doubling down on organic growth rather than focusing on M&A.
The ability to expand without buying another business is vital for organizations in our industry. One reason is that M&A transactions can be challenging. Right now, for example, it’s becoming more difficult to value businesses as market turmoil causes firms’ assets under management to fluctuate. Rising costs of capital present another challenge for buyers who don’t have cash. And integration is more challenging when advisors are working overtime to keep clients calm amid plunging portfolio returns.
A sound organic growth strategy can help ensure firms continue to pull in new assets through all kinds of environments. And speaking of M&A, firms with a track record of strong and durable organic growth tend to have more suitors and more leverage when it comes to making a deal. That may help explain why so many firms have been strengthening their focus on organic growth lately. But even as they do, we’ve continued to see confusion around what constitutes organic growth, and the most effective ways to achieve it.
How to Achieve Organic Growth
Many advisory firm leaders believe organic growth is that which is driven solely by sales and marketing initiatives. But while sales and marketing can undoubtedly be an important source of organic growth, they aren’t the primary levers for achieving it—at least not in an industry that runs on a recurring revenue model.
If you're selling T-shirts, or mutual funds, or donuts, sales and marketing strategies are critical to achieving growth, because you’re in a transactional business, where the need to drive the next sale is a constant. But in a recurring revenue service-based model, where a percentage of AUM or a flat, recurring fee, the greatest organic growth often will come from the clients with whom we already have relationships.
So, what are the most effective ways to foster growth within businesses that are built around recurring revenue business models? There are three.
- Investing in people to increase lead flow: Retaining talent is critical. Firms that don’t have the human resources to properly serve existing clients and cultivate new relationships will not only experience client attrition and slow lead flow, but they will have to work twice as hard to grow because they’ll constantly be playing catch-up. Having more people helps firms spread their message and serve clients faster. Firms who organically grow the fastest are adding people to generate the growth, not just people after the growth has already been realized.
- Investing in processes that generate client referrals: The second component of organic growth is the efficiency of the entire business unit. This means having quality client service processes that generate loyal clients and having clear systems and technology for employees to use and follow. Having those pieces in place will automatically generate client referrals as well as partnerships with other organizations that may send referrals. The best investment a firm can make to generate more organic growth, by far, is in creating a world-class client service chassis.
- Investing in your brand by adding additional services that increase service offerings available to existing clients: An advisory firm might add tax preparation services, for example, or roll out a 401(k) offering for clients who own small businesses.
So where does sales and marketing fit in the organic growth equation? Think of it as a way to build on to what you’ve already got. Once an organization has great employees, great clients and great referrals, investments in sales and marketing can spur additional growth. Yet many advisory firms make the mistake of prioritizing sales and marketing, rather than focusing on the foundational elements of organic growth described above.
Why do firm leaders so often turn to sales and marketing first? One reason is that it seems like a clean, clear-cut, straightforward route to moving the needle—a big, shiny growth lever to pull. It may be that our society has conditioned us to transaction-oriented sales and marketing to such an extent that it just feels right on a gut level. There’s also an undeniable appeal to taking tangible, decisive actions: If you're sending out an email every week, if you’re launching digital ads, if you are posting on social media, you're doing something that can be planned, executed, seen and measured, all of which feels good to the typical advisory firm leader.
By comparison, focusing on things like creating additional services, fostering a loyal and motivated employee corps who can generate new business, and building efficient processes and procedures backed by a client experience can seem like a long slog, in which it’s difficult to see clear-cut progress. But our experience has taught us that progress is inevitable if firms stay resolved and keep their priorities straight.
To support sustainable organic growth, all these elements will have to be built out sooner or later and doing so often proves more efficient than sales and marketing in the long-term, which involves significant client acquisition costs. Client acquisition costs for marketing programs can get so high that the client must be retained for several years before the firm breaks even.
So how can firms determine the extent to which their organic growth efforts are paying off? Most people will look at marketing numbers, such as the number of leads coming into the organization (the lead ratio) and sales numbers, the number of new clients the business is closing (the close ratio), as well as net new asset inflows.
In a recurring revenue model, though, great organic growth is often measured according to different metrics. To start, a good one is the degree to which the organization is expanding capacity to serve clients. If each of an organization’s advisors goes from servicing, say, 80 clients to servicing 125 clients, without a drop-off in service quality, and an improvement in service quality, that’s a great result.
After an organization has expanded capacity, revenue per client becomes increasingly important. If an organization is expanding the services provided to clients, the total revenue each client is producing will increase. In a recurring revenue pricing model, an upward trending revenue per client ratio has a compounding effect. Unlike a transaction-based business, the compounding effect of annual revenues is ultimately the key to effective organic growth.
The foundation of strong, sustainable organic growth often begins by looking inside the business for answers, not outside the business for quick-hit marketing and sales programs. Firms that hope to skip ahead and use sales and marketing initiatives as a silver bullet will, sooner or later, find it harder to create and sustain organic growth. Once you’ve built a high-capacity growth machine, (from the inside-out) layer on marketing programs to add an extra burst of lead flow.
Bottom-line, organic growth begins with people, process, and brand, in that order.
Angie Herbers is founder and managing partner of Herbers & Company, a full-service independent strategy, management and innovation consultancy serving financial advisory firms across the globe. To learn more, visit: www.herbersandcompany.com