Earlier this year, we launched our inaugural “True Ensemble Data Insights” study.* We are still analyzing the wealth of data received, but in our initial looks we uncovered an interesting—and perhaps concerning—growth trend.
In 2023, the independent advisory firms participating in our study grew their assets under management (AUM) by 20.3%, but their number of client relationships grew by only 8.3%. This year, firms are hoping to keep the momentum and target another year of near 20% growth, but it seems that we are placing our hopes with the market rather than our ability to add new relationships and more assets from existing relationships.
They say that success has many parents and failure is an orphan. This is certainly true with growth. We struggle with it, and we are disappointed by it, but no one wants to be responsible for the outcome or the change.
No Personal Accountability
To begin with, close to 58% of advisory firms do not articulate individual growth targets for their advisors. Instead, they set a firm-level goal that will somehow be accomplished by their collection of people. When I ask the question in my meetings: “Who is responsible for growth?” the answer I usually hear is, “Everyone!” which makes me very, very worried. Author and literary critic G.K. Chesterton once said: “I searched all the parks in the city—there are no statues of committees.”
Most advisory firms fear setting growth targets on individuals. This would mean, for example, asking a lead advisor to bring in 10 new clients in 2024 or alternatively bring in $10 million in AUM. Firms are reluctant to do that whether that target is expressed in assets, clients or revenues for fear that such a target will damage the culture and the relationship with the person. But unfortunately, without individual responsibilities and accountability, we are all known to fail easily.
Consider this MIT experiment: In one class, professors randomly assigned their students to three groups—one had a teacher-assigned deadline for a paper. The second group could choose their own deadline, which they would be held accountable to, and their grades were lowered as a penalty for late papers. Finally, the third had no deadline at all, submitting the paper when they could before the end of the semester.
Importantly, the group with the self-selected deadline did better than the no-deadline group but worse than the group with the teacher-selected deadline. As it turns out, we do better when someone is looking over our shoulder. Perhaps we should apply that concept to growth.
Yet we don’t. We don’t create mechanisms of accountability, and we set goals that are doomed to fail. What is more, we prefer to hide from the growth conversation and simply hope that things will work out.
I understand why firms are afraid of targets for individuals. Insurance firms were doing that, and it was seen as pressuring their agents to sell more, perhaps at the expense of their clients. Wirehouses were doing that, too, and perhaps their sales competitions degraded the professionalism of the advisors and promoted the profile of those who put more assets in products rather than kids in college and retirees in lounge chairs. Sales pressure is not consistent with fiduciary professionalism.
The concern is understandable but overblown. What team sport does not track individual statistics? They all do: All modern team sports compile enormous amounts of individual data to tell them who makes the greatest impact. They do it to identify what strategies work best and what players contribute the most. They do it to identify what skills players need to develop.
The most common concern is about a firm’s culture. The worry is that if a firm asks each of its professionals to bring 10 clients in next year and keep some statistics on who brought what, the firm will turn into a multi-level market scheme that peddles advice.
But that idea can be taken too far. While it’s certainly true that every measure of performance has an impact on behavior, simply measuring the number of new clients is very far from turning an advisory firm into a car dealership.
The Anti-Growth Myths
Without accountability, we’re creating dangerous myths, and we perpetuate them to the detriment of young professionals.
One of these is the legend of “the financial advisor who is amazing at working with clients but is not a good business developer.”
Most client opportunities come from referrals—the data says clearly that more than half our leads come from existing clients. So how is it that someone can be doing an amazing job with 125 clients and not also be growing the group?
A doctor without a patient is not a doctor, just a person with a diploma. It’s the patient who makes a doctor. Likewise, to be an advisor you need clients to help. A professional who is consistently onboarding new clients is always exposed to new challenges, continues to learn and develop new skills and has a broad perspective on the same market. A professional who works only with the same clients may fall behind the times.
This is not to suggest that professionals should each be ending every meeting with “We are looking to grow. … Do you know someone else who can benefit from the amazing work that we do?” This kind of speech can kill the enthusiasm of even SpongeBob.
We usually hope that referrals come unsolicited from the amazing job we’re doing. But perhaps even here we don’t do as good a job as we could. Our study shows retention of AUM at 98.6% from last year, yet that’s a low standard since retention simply means that clients aren’t motivated enough to change. They may need something else in order to refer.
What Happened To Business Developers?
The dissatisfaction with the growth results has driven many firms to explore the possibility of hiring business developers who specialize in growth so that the “service-oriented advisors can focus on service.” The idea is sound on paper, but it doesn’t stand scrutiny when we examine the data.
Very few organizations use business developers, and when they do the results are underwhelming. In our survey, only 10% of all firms had a business development officer position. (Firms that use such an officer while also using custodial referral programs are an important exception.) That’s because, as I’ve noted already, service and advice should be connected.
So, Who Is Growing Fast?
We’ve pointed out several problems, but who has a solution? To search for firms that grow well, in our study we divided participants into different categories (70% of the advisory participants in our study target high-net-worth individuals—those with more than $1 million and less than $25 million in assets—while 17.4% focus on merely “affluent” clients). We found that indeed there are some characteristics that allow advisory firms to grow faster:
• Spending on marketing works. Firms that invest in marketing grow faster. The average advisory firm spends only 1.5% on marketing. When we isolate firms that spend more than 3% of their revenue on marketing, we find that they grew median revenue twice as fast.
• Smaller clients help. Firms that focus on affluent clients (those with between $500,000 and $1 million in assets) are growing their net new AUM at a 44% faster rate than the average.
• Accountability works. Firms that have institutional ownership (in other words, that have been acquired) grew net new assets 9.2% while firms owned by advisors grew by 4.7%. Perhaps the added discipline of having a corporate parent puts pressure and resources to good use—and the result is faster growth.
• Being younger helps. Firms with younger partners grow faster. If we use the years of experience as a proxy, firms whose senior advisors average less than 12 years of experience grew net new assets by 14.4%, which was nearly twice as fast as those with older leadership.
Growth in the context of our industry depends on both competition and individual effort, much like running a marathon. Growth ensures that a firm does not fall behind in how it services clients and how it develops professionals. As the saying goes, “You don’t have to be faster than the bear; you have to be faster than the other guy running from the bear.”
Growth also requires the work of individuals, though, something that must come from the culture. Some firms have the ambition to be large and influential in the industry; they feel a need to grow and be as fast as the competitive marathon runners. Others will simply seek the satisfaction of reaching their goal and achieving something to be proud of. We all need to grow though. You can’t finish a marathon by standing.
Why It’s Essential
Growth is an essential ingredient of success for every organization. Growth creates resources that can be deployed to serve clients better, to take better care of our teams, to generate better returns on investment for our owner-advisors … in other words, growth creates more growth.
But how it is paced will be different for each organization. Some firms choose to grow very fast, and some grow more patiently. But moving forward is the key. As marathon runners will tell you, sometimes you can walk a race, but you can never stop. If you do, you will find it very hard to start again. And just like a marathon, some will finish it in record time and others will take five or more hours. But all deserve enormous respect for doing something remarkable.
In other words, choose your own rate of growth based on your strategy and your resources. Choose a rate of growth that fits your culture and the ambitions of your team. But never stop never stopping, as Andy Samberg would say!
*The True Ensemble™ Data Insights 2024 study was issued earlier this year. The findings in this article are from preliminary data analysis. The comprehensive report will be shared later this year.
Philip Palaveev is the CEO of the Ensemble Practice, the leading business consultants to the financial advisory industry, and founder of the G2 Leadership Institute, a leadership program that trains the next generation of leaders.