How do you keep your firm's growth strategies from killing excellent client service? It’s a constant source of tension. My firm, Savant, is no exception. As we’ve grown, we’ve had numerous debates on the topic. Do you grow by onboarding new clients or by the care and cultivation of the ones you have? If you dial up your emphasis on one, does that mean sacrificing the other?
I frequently talk to RIAs who are quick to say they are not overly worried about growth. Some even concede they will never be big and, in fact, they don’t want to be. Rather, they are principally concerned with being the best — an admirable, excellence-only policy. They want deep relationships with clients, to offer great advice and to deliver an outstanding client experience.
But I wonder if, underneath these no-doubt sincere fiduciary, altruistic sentiments, these firms haven’t defaulted into being a lifestyle practice. Have they created their own RIA hot tub, collecting larger profits (for now) but failing to hire A-players and
At the other end of the spectrum, some mega-RIAs seem to have a singular growth-only focus, investing aggressively in marketing and promotion to drive customer acquisition. This damn-the-torpedoes approach may leave little available to invest in people and technology — never mind improve the customer experience.
To see the shortcomings of the growth-only approach, just take a look at how private equity investments have impacted RIAs. These deals have created a subset of large firms willing to grow via hyperactive inorganic growth, but with seemingly little regard as to how that strategy may affect clients and team members. In their quest to accelerate top-line revenue, they make organizational compromises to quickly achieve scale.
Yet excellence-only firms can easily, nearly imperceptibly, default to eschewing big strategy decisions. It just happens — life is good when you are making money, particularly in the early days of finally making a living. Growth would require increasing expenses, working harder and, truthfully, taking more risk — or so it might feel at the time. Why not just keep doing what you are doing — especially if long-term clients don’t complain?
The problem is that both excellence-only and growth-only strategies are deceptively unsustainable. Either in isolation produces wealth in the short- to-intermediate term. Excellence-only maximizes short-term cash flow. Growth-only maximizes intermediate-term cash flow. Both, in my view, come up short in the long term.
Once excellence-only firms achieve scale the RIA prints money, for a while. But lack of growth eventually erodes profitability, reducing the value of the practice over time. The upside is that erosion is slow — current baby boomer clients are sticky, as we know.
- Key people should be focused on rainmaking, not endless other tasks.
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The first 100 days are critical to keeping a new client for life … or watching them jump to a competitor.
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Clients appreciate the depth of expertise that a practice can provide.
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But failing to invest appropriately means it will be increasingly difficult to attract new clients. Gen Xers and
Growth-only can generate intermediate-term benefits. Traditional private equity- and venture capital- funded firms, as mentioned above, do this well. But the strategy may require a number of compromises. For one, they may pay top dollar for slow-growth RIAs.
I wonder if, underneath these no-doubt sincere fiduciary, altruistic sentiments, these firms haven’t defaulted into being a lifestyle practice.
Secondly, they hodgepodge together portfolio companies with distinct (and often incompatible) cultural identities and investment philosophies.
Third, they cut costs (i.e. staff, infrastructure, etc.) to maximize near-term EBITDA. In the case of leveraged private equity firms, to increase their equity return they maximize debt acquisition of the platform they just purchased, thereby inflating debt service payments (principal and interest) for the platform, and limiting cash available to re-invest. The effects of robbing the roadmap are rarely considered, or even acknowledged. They then auction the conglomeration to the highest bidder—typically a larger PE firm who starts the whole process over.
Venture capital-backed firms
Whichever flavor of third-party equity, the mandate is to maximize value for the original PE/VC firm, while also providing a payday for RIAs who chose to sell to them. But, as perhaps you are beginning to appreciate, this can create bad outcomes for your clients and team. Assembling misfit firms, and eventually window dressing, by cutting costs (versus investing for the long term), means the fiduciary experience and technology you offer clients will be uncertain at best when your PE roll-up firm is prepped for sale and flipped.
When considering wealth generation, firms that focus mostly on excellence reap high current cash flow. Unfortunately, that cash flow dries up as growth subsides and clients get old and die. Firms that focus exclusively on growth struggle later as their failure to invest in top-quality teams and technology takes its toll.
Excellence-only is like trying to run a marathon without adequate training. You start out strong but fail to finish the race. No fun.
The problem is that both excellence-only and growth-only strategies are deceptively unsustainable.
Alternatively, growth-only is like using steroids to win a bodybuilding competition. It works briefly, but health problems shorten your career, and maybe your life (yikes!). Yes, a growth-only RIA or PE owned firm can expand margins for a while — just not over the long run. They don’t benefit from long-term compound interest in the far-out years beyond their owners’ institutional mandate.
In fairness, both excellence-only and growth-only may be viable strategies if you only care about maximizing near-term or intermediate-term cash flow. But, for RIAs who are in it for the long haul and who desire to both be excellent and grow profits, there is an alternative path — albeit one that, like compound interest, takes time and patience.
While on their own, excellence-only and growth-only strategies are unsustainable, magic happens where growth and excellence intersect.
Happy medium
What is the magic formula for positioning your RIA at the intersection? It’s simple, at least in principle, and resides at the intersection of an RIA’s long-term investments in the best people, process, technology, client deliverables and brand. Anecdotal evidence collected over the years indicates that targeting a 15% growth rate (by making right-sized investments that both grow revenues and drive innovation) can result in sustainable and profitable growth that benefits your clients, your team and your shareholders.
While attending a recent keynote presentation by Alan Mulally, retired CEO of Ford, I discovered what I believe to be a workable framework for the growth/excellence trade-off dilemma.
Mulally referred to this optimal level of re-investment as PGA (Profitable Growth for All). Interestingly, I have long believed (and even preached!) that investing for 15% growth is critical to an organization’s success. Alan concluded the same while making cars and airplanes (and at a much larger scale).
What does the wealth generation sequence look like if you invest at a level that achieves 15% annual growth? While profits are less in the near term than the excellence-only RIAs and less in the intermediate term than growth-only RIAs, in the long term (i.e. over 10 years) investing optimally in people and technology — while avoiding the intermediate-term cost cutting that derails the quality of your advice, people and client experience--allows maximum wealth creation for RIA owners. It likewise provides greater outcomes for other critical stakeholders like your clients, team and others who rely on you as a supplier, customer and contributor to your community.
With patience, discipline and just a little bit of strategy, you can expand the pie for everyone. I found Alan’s presentation both uplifting and reassuring, and hope you, too, can make the most of this privileged industry we are building together.
