This is perhaps one of the most important and perplexing questions that independent firms must address as part of their annual practice development planning process. Unfortunately, there is no pat answer. There is however, a three-phase process firms can follow to determine an optimal investment level for their marketing efforts.
The first phase is to evaluate category performance trends both nationally and locally. Determining how the market is trending on key performance criteria such as revenue, operating profit and client acquisition will help establish a baseline to guide firms' budget-setting efforts. Given the potential variance from year to year, it is best to look back at least three years and project forward at least two. For instance, in 2009 the average FA saw revenue decrease 9.5% from 2008 and only realized a 4.5% growth in the number of new clients. This changed quite dramatically in 2010, with projected revenue increases of 16.3% and client growth of 6.0%. As part of this phase, firms must then assess their growth posture. Are they mining an existing book of business with no transition plan? Looking to maintain revenue by offsetting client turnover? Interested in outperforming the market and their key competitors?
Phase two involves an assessment of the firm's historic performance against a handful of practice development criteria including annual client turnover, lead generation, prospect conversion and revenue realization from cross-selling current clients as a percentage of total annual revenue. Understanding how the firm is trending in these areas will shed light on whether the firm will need to reverse a negative trend or maintain positive momentum and will likely impact the decision on marketing spend.
One of the principal goals of marketing is to profitably drive revenue while distinguishing the firm for competitive advantage. In reviewing the findings of the 2010 FA Insight Study of Advisory Firms' "Growth by Design" analysis, a couple of clear patterns emerged:
1. The need for marketing: 48% of new clients came from existing client referrals, meaning that over half of a firm's new clients resulted from some other aspect of their practice marketing efforts.
2. Marketing matters: Firms that embraced a "growth by design" approach significantly outperformed their counterparts with annual growth rates that were 10% to 30% higher and operating profit margins that were 12% to 16% greater.
Having a marketing or practice development plan that defines the firm's target audience, key value propositions and articulates their service offering in a clear and compelling manner were key components of the top performing firms' success. Woody Allen had a great quote; "Eighty percent of success is showing up." And while this may be so, the other 20 percent involves diligent planning, flawless execution and introspective performance reviews to assess results and actualize learning. Ironically, marketing planning, in spite of its importance to an organization's success, is often overlooked by independent financial advisory firms. A formal marketing planning process doesn't have to take endless hours or result in a document consisting of reams of pages that go into a three-ring binder and gather dust on a shelf. It involves asking the right questions to assist in establishing goals for the firm, that will then drive resource allocation decisions and ultimately the strategies and tactics that will be employed to achieve those goals. Simple, straight forward questions that will yield much in the way of feedback to fuel the firm's positioning and marketing strategy decisions; What business are we in? What do we do? How do we do it? Who do we do it for?
In phase three the firm establishes a methodology for marketing-plan funding and sets a budget level. Weighing the insights gained from the first two phases, firms can then determine their budgeting approach; zero-based, adjust marketing spending up or down a percentage from last year's budget or target a fixed percentage of gross annual revenue. A zero-based approach would be preferable given that the marketing budget would be built around specific in-market needs and firm growth objectives. Over time, this approach will actually yield greater efficiency by aligning spending with results. With funding methodology and spending levels determined, the question remains; "How does this stack up against other FAs?" In the 2010 FA Insight Study of Advisory Firms, the average marketing spend ranged between 1.5% and 3.5% of gross annual revenue. As a rule, newer firms, firms that are in the early stages of their growth trajectory, and high growth firms spend at a higher percentage of gross annual revenue, which makes sense. There will be times in a firm's evolution that they will spend less than the category average and times where they may be required to invest more.
At the end of the day, firms should link spending to their goals and adjust based upon their historical return on marketing investment.
Cliff Campeau is a partner with Evolutionize LLC and a regular blogger on financial services marketing "Best Practices." Evolutionize specializes in providing independent financial services firms with a suite of web-enabled practice development solutions ranging from website development and outbound marketing tools to a comprehensive social media program management system. Questions? Call Cliff at (314) 863-3033, ext. 204, or reach him via e-mail at [email protected].