Growth can be a conundrum for many independent investment advisors: How to achieve it? How to manage it? How to survive it? It's the classic tale for today's financial advisory business. As a firm principal, you see the opportunities in front of you, and you (hopefully) know the value your firm brings to clients. But you may still worry about how you're going to achieve growth and, if and when you do, what it will mean for your business, your team and your clients.
Growth doesn't have to be elusive or disruptive. In fact, the fastest growing firms are also turning a very healthy profit. According to a recent report by my firm, Schwab Institutional, titled RIA Benchmarking: Growth Trends Study, median compound annual growth for Schwab-affiliated RIAs from 2002 to 2005 was 24 percent in assets and more than 18 percent in revenues. But the fastest growers are expanding at double that rate. The study, which polled 1,200 RIA firms that custody with Schwab, found that a fifth of participating firms grew an average of 48 percent in assets and 42 percent in revenues. What's even more impressive is that these firms were able to do so while maintaining a 23 percent median standard operating profit margin.
Of course, market performance hasn't hurt. According to the Schwab study, about 40 percent of asset growth across all RIA firms from 2002-2005 came from investment performance. But among the fastest growing firms, investment performance was decidedly less important — accounting for only 20 percent of growth in assets. For most firms, including the so-called growth leaders, the principal source of growth was, by far, referrals from business partners and existing clients, which together accounted for roughly 80 percent of new assets. (See table on page 131, “It's All About Referrals.”)
And yet, for those firms that aren't growing as quickly as they'd like, the problem is not actually finding new clients. The study found that 58 percent of the 1,200 advisors surveyed reported at least one “significant” or “very significant” barrier to growth. Staff time was the most frequently cited barrier, followed closely by “insufficient growth planning.” In other words, the biggest barriers to growth are more about capacity and planning than about bringing in new business.
Lessons From The Leaders
So how do the so-called growth leaders do it? Of course, there's no “silver bullet.” But in interviews with these firms, we found that they had at least four things in common: a “culture” of growth, a very well-defined target client, a disciplined marketing strategy and a focus on delegating tasks and standardizing processes.
- Instill a culture of growth
Creating a culture of growth must begin at the top with the principals of the firm. There are three key steps to creating such a culture:
- Set a goal, and a strategy for getting there
Most plans focus on the three classic questions of business planning: Where are you now? Where do you want to be? How are you going to get there? While the plans need not be overly-detailed, they should be specific, focused and measurable.
- Communicate those goals and vision throughout the firm
In meetings, inter-office literature and even with some referral sources, the growth goals and vision of the firm should be made clear, and repeatedly emphasized.
- Set accountability for achieving those goals and measuring progress
Specific people or groups of people need to be made accountable for achieving growth, and measuring the progress made toward achieving specific goals — enterprisewide, departmental and individual. Many firms have routine “growth” meetings to check on progress.
- Set a goal, and a strategy for getting there
- Focus on your ideal target client
The fastest growing firms tend to have a well-defined set of clients. Similarly, many firms set client acceptance standards, and rigorously enforce them. That's not to say that an exception can't be made for a client who doesn't meet the minimum asset level, but has other intangible qualities that make him or her a good client.
- Develop a disciplined marketing strategy — and stick to it
Unlike many advisors who simply think “if we do a good job for our clients, then growth will come” (which is clearly the first step), growth leaders have added more discipline to their approach to marketing. Research reveals that these plans don't have to be overly elaborate — in many cases they are simple and focused on a few tactics that can be refined over time. Key parts of a plan should include a definition of the firm's ideal clients and an articulation of the firm's story — the unique value proposition that sets it apart from competitors. Successful firms recognize that marketing must be driven by constant analysis of client demographics and referral sources. Once a marketing plan is implemented, results should be tracked, and the plan refined as needed.
At the core, these plans must address referrals head on. Most advisory firms have no clear process in place for seeking client referrals, and are often uncomfortable asking for referrals. But they shouldn't be. According to a 2005 Schwab study titled Key Strategies for Building Optimal Client Relationships, 90 percent of advisor clients say that they are somewhat, or completely comfortable referring friends and family to their financial advisors.
- Organize yourself
Principals of firms that grow successfully spend less time on operations and portfolio management, and more time on client service and business development than other firms, according to Best-Managed Firms: It's About Time, a 2007 Schwab Institutional report. In other words, they focus more on client-facing activities and delegate other functions to staff. It is a matter of having the right people in the right seats on the bus.
The firms cited in the report have also built scale and efficiency by continuing to automate and standardize functions and processes. By formalizing these functions, they become routine and growth becomes easier to manage.
Growth, then, is not just about hiring the right business development officer, merging with another firm or finding some pocket of wealthy clients that hasn't been tapped. It begins with taking the time to come up with a clear plan for where you want to be, and how you're going to get there — in two years, five years and 10 years — and then creating a culture throughout your firm that follows that plan and prepares the firm to manage growth when it comes.
David Welling is vice president of marketing & advisor business management at Schwab Institutional, a division of Charles Schwab & Co, Inc.