Most small and midsize advisory practices failed to hit their growth targets last year, and 2023 most likely will be no different despite optimism that 10% growth will be possible, according to the Ensemble Practice’s "Pulse of the Industry" survey.

“People are optimistic by nature. Everyone on January 1 says they’re going to lose 10 pounds and get in better shape,” said Philip Palaveev, CEO of the Seattle-based consulting group. “This is the same thing. Advisory firms know what they want, but they are not natural marketers, do not invest enough in marketing and don’t have a clear vision of how they will solicit and win new clients.”

Most firms count on someone in their region waking up one morning, deciding they need a financial advisor and then finding the firm, said Palaveev, adding that while a firm’s reputation can lead new clients to its door, that’s not predictable enough business to support double-digit growth in a difficult market.

The Ensemble Practice survey measured growth in client relationships, and found that both small and midsize firms have targets of 10% for 2023. However, actual growth in 2022 was much lower—at 4.7% for small firms and 7.3% for midsize firms.

In comparison, large firms are eyeing 5% growth for 2023 after hitting 6.9% growth last year.

Add to that a 7.2% net decline in firms’ assets under management in 2022 (the S&P 500 dropped 19.4%, but firms made up for that by bringing in some new clients), and the industry might be facing some belt-tightening. The survey also looked at the ways advisory firms said they are going to cut costs.

“In the advisory industry, 75% of budgets are dedicated to people. If we really need to cut budgets, unfortunately that means cutting people. There’s no other way to do it,” Palaveev said. “Typically, a firm will stop hiring for open positions and not increase compensation for the employees who stay. But that’s very short-term thinking. Talent is very difficult to find, and when you’ve lost them, they’re not easy to replace.”

Nor cheap, he continued. Whereas a current advisor may draw a salary between $120,000 and $180,000, to hire a new advisor could cost as much as $170,000 or more than $200,000. Nevertheless, 45% of small firms and 63% of midsize firms said they had open advisory positions at the end of 2022 to fill in 2023.

The general attitude advisors had about their budgets was generally positive: 57% of firms surveyed indicated they would spend the same or more this year, while 43% said they’d cut back.

And while recruitment was a top concern in the past, firms have now made improving profitability their top priority, given the choppy markets, and the second and third priorities were to improve their efficiency and processes or add new clients and assets. They put the recruitment of new professionals down at fourth place among their priorities.

For the “Pulse of the Industry” survey, the Ensemble Practice polled 85 firms with an average of $1.4 billion in assets under management at the end of 2022.

(Palaveev also contributes to Financial Advisor magazine.)