Years of cheap borrowing and bullish markets have pushed organic growth to the back of mind for many advisory firms, but sharp downturns in asset growth and a declining M&A environment may be throwing a spotlight back on the nebulous jungle of organic growth.
While M&A activity hit a record high for the 10th straight year in 2022, with 341 total transactions, the
The decline is "partially driven by macroeconomic uncertainty," according to the report. As the number of deals declines, buyers are also
That environment also drove the industry's AUM growth to a multiyear low in 2022, according to Charles Schwab's 2023 Benchmarking Study. Top-performing firms had no AUM growth last year, down 28 percentage points from the year before. Other firms were even worse off, with minus-9% AUM growth in that same span.
In such an environment, experts say organic growth is imperative.
Advisory firms "oftentimes go through the same cycles as their revenue does," said Angie Herbers, founder of organic growth consulting firm Herbers & Company. "When they're organically growing very quickly, they often stopped focusing on organic growth. And when they're not, they start focusing on it more again. What builds the wealth and what builds the growth is the momentum."
Despite the flurry of headlines around inorganic growth in recent years, few firms have the capability to grow inorganically through things like acquisitions and advisor recruitment. Over the last five years, just 19% of firms have engaged in M&A activity, according to Schwab's study, and only 24% recruited an advisor with a book of business.
For the majority of firms, organic growth is the only path forward.
"Most firms are not able to acquire just because they don't have the capital or the time or the wherewithal," said Tim Welsh, the president of consulting firm Nexus Strategy. "So they have to look at organic growth to be the driver to be able to stay as a sustainable, successful business."
Growing what?
Despite the importance many firms put on the idea of organic growth, it's hard to pin down exactly what it means.
The term is often tied to AUM, revenue, new clients or some combination, with firms and consultants offering their own reasoning for why they prefer certain metrics.
This flexibility allows organizations to "make up any story they want" about the current state of organic growth, Herbers said.
Still, Steve Sanduski, the co-founder of ROL Advisor and the founder of Belay Advisor, said the concept of organic growth "should be pretty clear."
"It is simply assets in the door minus assets out the door, excluding business that you have purchased," Sanduski said.
For advisory firms, excluded assets are any M&A activity and any advisor recruiting that brings a book of business. Alongside such activity, organic growth also excludes market movement. Firms will say "'Hey, the markets were up 30% last year, I got 30% new revenues. That's awesome. How smart am I?'" Welsh said. "I'm like, 'Well, you didn't do that really. That was the markets.'"
So what is left? As Herbers put it, "Organic growth is your ability to expand through the resources that you have." In more concrete terms, that consists of either acquiring new clients — usually through referrals or marketing — or expanding wallet share, whereby firms offer more services to capture more of a clients' finances.
The state of things
In the world of financial advising, "decline" is a dirty word. Yet it pops up often when talking to industry experts about the state of organic growth.
Catherine Williams, the head of practice management at Dimensional Fund Advisors, said that "flat" is a more accurate term to describe organic growth over the past few years. She leads a team of researchers who produce the company's global advisor study, a benchmark tracking hundreds of firms to provide data about the state of the industry.
Benchmarking studies from Dimensional, Charles Schwab and Fidelity offer the clearest available pictures when it comes to the state of organic growth, but even these findings can differ.
According to Schwab's latest data, the rate of organic growth declined 3.7 percentage points in 2022 — nearly half what it was in 2021. Since Dimensional and Fidelity have not yet released their data on 2022, it is not possible to compare them to Schwab's findings.
In 2021, the most recent year of data available from all three, there were 3.8 percentage points of difference between each study's organic AUM growth rates. That gap can be explained by two main differences.
First, each organization uses a different sample of firms — Schwab's study includes 1,300 firms that custody their assets with Schwab or TD Ameritrade, while Dimensional's and Fidelity's studies include roughly 500 and 200 U.S.-based firms, respectively.
Second, each study subtracts market returns using different assumptions. While Dimensional uses a hypothetical 60/40 equity-bond portfolio to calculate annual market returns, Schwab's managing director of business consulting and education at Schwab advisor services, Lisa Salvi, said they "wouldn't assume a 60/40 portfolio split."
"Because we have the deep data, we don't have to make assumptions and guess," said Salvi, who leads the research team for Schwab's benchmarking study. "My team and I can actually look at the specific organic growth, and it's a positive contributor."
Sanduski, who recently published an
"Of course, that's not 100% accurate, because maybe it's not a 60/40 allocation. So basically I'm saying it's directionally correct to say that, over that five-year period, there was essentially no organic growth on average for advisory firms," Sanduski said. "Now, there are obviously firms that are growing organically and growing pretty significantly. But then there's a lot of firms that aren't growing, that are just sort of fading away a little bit."
The Schwab analysis found that there was a 6.5% organic AUM growth rate over that same period, according to Salvi.
Such variance may be a concern. However, when looking at four-year averages for each study, their overall findings are strikingly similar.
From 2018 to 2021, Schwab, Dimensional and Fidelity found an average median organic growth rate of 6.2%, 5.5% and 5.7%, respectively.
Alongside their overall organic growth rates, the industry's various benchmarks also provide insights into the small cohort of firms achieving above-average growth.
"There's really good results, kind of amazing results in some cases, considering all the market conditions. And those things that those firms do, other firms can do those, too," Salvi said.
Getting a green thumb
Individual advisor anecdotes often tell a more optimistic story than the data.
"If you talk to advisors individually, many of them will tell you that they're still growing through referrals and introductions from current clients," said Penny Phillips, the president and co-founder of Journey Strategic Wealth. "[But] if you look at the RIA landscape, we know that most firms actually haven't been organically growing. Most have grown because of the market."
If you ask Welsh of Nexus Strategy, "Ninety-nine percent of the industry does it terribly," he said. The benchmarking studies are slightly more generous.
Of the 1,300 firms included in Schwab's study, top-performing firms — those that rank in the top 20% of Schwab's Firm Performance Index — have demonstrated consistently higher rates of organic growth than their competitors.
Dimensional has its own flavor of superlative group — called high-performing firms — that contains approximately the top 25% of firms in its study across five key metrics, including revenue growth, client retention, employee retention, profit margin and revenue per advisor.
Both studies, by identifying firm practices that differ between their superlative groups and all other firms, identify a range of "best practices" that firms can adopt to boost organic growth.
Generating referrals
When it comes to generating new business, referrals are king.
In 2022, referrals from clients and business partners accounted for 70% of new clients and 69% of new client assets, according to Schwab's study.
That's true for all firms in the study, but top-performing firms — which gained 113% more new asset growth from referrals than other firms — are capitalizing on it significantly more.
Salvi said that one of the ways that top-performing firms get there is through "documented referral plans" for clients and business partners. For Schwab, such a plan consists of
Other growth experts put it more simply: just ask.
"We know from our Global Investor Survey that clients have a huge appetite to refer," Williams said. "Yet, over and over again, we see little to no appetite on the advisor's part to lean into that in any way. They do not want to raise the conversation of referring with clients. They'll do it with centers of influence (COIs) [a term for businesses, such as tax firms and estate planning attorneys, which refer clients to each other] all day long. But with clients, they're a little more apprehensive."
On average, firms with documented client-referral plans saw 1.6 times more new clients than firms that did not have a documented plan, according to Schwab's study. COI referral plans were even more effective, generating four times more new clients from business partner referrals.
For advisors hesitant to broach referrals with existing clients, the power of COI referrals is particularly significant.
Referrals from COIs had "twice as large" an effect on growth as referrals from existing clients, which are associated with an increase of 1 to 2 percentage points in AUM, revenue and client growth in the same year, according to a multiyear analysis of Dimensional benchmarking data from 2015 to 2019.
"COIs' greater impact might be due to their industry-specific knowledge as well as their experience working with multiple advisors," said Marco Di Maggio, a lead researcher for the study and an associate professor at Harvard Business School.
The digital landscape
Despite industry findings on the scale and impact of new client referrals in driving organic growth, experts say that firms still need to develop their online presence if they want to maximize growth potential.
"Eighty-one percent of clients who are referred by an existing client are still going to go check you out somewhere," Williams said. "So, you have to be out there in the digital landscape, even if your only goal is to grow through client referrals."
Salvi agreed.
"If I told you to go check out a restaurant, you're not just going to show up at the door. You're going to look at the website, you're probably going to look at the menu to see what kind of cocktails they have, decide if you like the vibe," Salvi said.
Before a firm can effectively pursue a digital marketing strategy, they need to be "very clear on the problem that they're trying to solve," said Meg Carpenter, the CEO at FiComm Partners, a marketing consulting firm for the wealth management industry.
"Let's say [a firm was] growing at an average of 7% to 8% year over year, net of market, and today, it's somewhere around 2%. What's the difference in that?" Carpenter said.
Diagnosing that gap is just the first step. With it, firms need to be "very clear on the vision and values for the business, and also very clear on target audiences," she said.
As industry consultants often remark, not all firms want to grow. Even among the ones that do, they rarely would like to "replicate 100% of their clients," Williams said. That's why the next critical step is for a firm to figure out its "ideal client persona."
The answers to those questions are what ultimately drive a firm's marketing strategy, whether they are focusing on social media, existing client communications, educational content creation, nurturing dormant prospects or creating new centers of influence, Carpenter said.
A firm's focus "could be a whole host of things," Carpenter said. "But the most important thing is that the only thing that's done is what's going to work for the business and not what sort of works for everybody else."
The data agrees.
On average, firms with "written marketing plans, ideal client personas and client value propositions" attracted 52% more new clients than firms that did not, according to Schwab's study.
Where the studies disagree is on the total cost of such marketing.
Schwab's most recent benchmarking study found that top-performing firms spend 2.4% of their revenue, on average, on marketing and business development, roughly 20% more than other firms. Yet, Dimensional's latest study found that high-performing firms spent just 1.5% of revenue on marketing and business development.
One possible explanation for the discrepancy is that Dimensional does not include spending on talent dedicated to marketing, sales and technology — an expense that often grows with the company.
Regardless of the disparity, Williams said that firms do not need to start spending drastically more on marketing.
"This is not about suddenly being willing to spend 5%, 6%, 10% of your revenue on marketing and growth," Williams said. It is about "how they're spending those dollars. They've really taken the time to figure out 'What is our strategy? Again, where are the clients we most want to work with?'"
The correlation problem
Organic growth is not an exact science.
Benchmarking studies try to identify the practices that drive top-performing firms to earn their industry-leading positions, usually by comparing the differing rates at which they employ various referral and marketing policies.
But, as any scientist will attest, correlation is not causation.
Consider the hoard of articles listing the habits of highly successful people like
Will reading a lot, sleeping seven hours a night and drinking herbal tea turn the average person into the next Bill Gates or Steve Jobs? Probably not.
So it goes with RIA benchmarking studies.
High-performing firms' use of practices that are less prevalent at other firms isn't necessarily the reason for their successes.
Benchmarking studies, to their credit, are far more sophisticated in their approaches, identifying correlations between advisory practices and growth through a large sample of RIAs, not anecdotes.
Still, even researchers acknowledge the limitations of their work.
"Am I going to say, 'If you go dial up your COI relationships, you are absolutely going to achieve a certain level of growth?' No way, I am not going to say that," Williams said.
For RIAs, benchmarking studies are valuable because they offer a "baseline to understand what their peers are doing," Carpenter said. But without being able to "look under the hood" of those top-performing firms, it can be unclear how factors like inorganic growth activities and exclusive custodian referral programs are driving growth.
Welsh of Nexus Strategy describes custodian referral programs as the industry's "hidden secret."
The programs — such as Schwab's
Details around Schwab's program are opaque. While it specifies that clients must have a minimum investment of $500,000 to participate in the advisor network, Schwab does not disclose the minimum AUM an RIA must maintain to qualify for the program. The program includes "approximately 200 prescreened independent advisory firms," but it does not disclose who those firms are.
Fidelity's program is relatively transparent, including roughly 70 advisory firms in total — a
Still, the exact details around how firms are selected for these programs and how much program referrals contribute to new client acquisition at advisory firms are unclear.
Such programs are "the biggest driver of organic growth in the industry," according to Welsh. "It's worse than crack cocaine, because once you get those, then you don't have to market at all. You just have to wait for the phone to ring from the Schwab rep who says, 'Hey, I'm sending Suzy and Joe to your office next Tuesday. They've got $10 million, they need some help. Have a nice day.' You go, 'Touchdown!' Right? 'How hard was that? I just picked up the phone.'"
There is no data to quantify how much of an impact such programs have on overall organic growth. For advisors looking to learn from the top-performing firms in benchmarking studies like Schwab's or Dimensional's, that may pose a problem.
Salvi and Williams say that their superlative groups at Schwab and Dimensional contain firms of different sizes, making exclusive custodian-referral programs negligible when studying these fast-growing RIAs.
Yet, because neither study discloses the firms they include in their groups, it is impossible for advisors to know what, if any, impact referral programs may have on their organic growth rates.
Growth starts with the grass
Herbers, who grew up in western Kansas, likens RIAs to ranches.
"Most people believe ranching is about cattle," Herbers said. "Ranching is first about the grass that the cattle grow on. So ranchers often joke that they are grass farmers first and cattle producers second because if the grass isn't good, then the cattle can't be good."
Just like a ranch has its own unique combination of rainfall, sunlight and soil, a firm has factors that make its situation different from every other firm's, Herbers said. As a result, there is no formula, no blueprint, no set of "top 10" practices that is going to guarantee an advisory firm organic growth.
"So the goal first when we're dealing with organic growth is to recognize that you cannot skip over the work that needs to be done to come to the realization that you are unique and that your piece of land is different and that you have to take the time to figure out why it's different," Herbers said.At Journey, Phillips said their first step in creating an organic growth strategy is "creating capacity" for their advisors to figure out that "why."
In an industry of consolidation and prescriptive strategies, Phillips said that it is important for firms and aggregators to "honor the uniqueness of advisory practices."
"The reality is that each advisor serves a specific type of client with a specific need, with a specific goal and a specific demographic and psychographic profile," Phillips said. "I think firms need to be nimble and open to the fact that organic growth is going to be comprised of different sources."
That optimal combination of practices is going to be different for every firm, but for those wanting to maximize their organic growth, they can start with the grass.
