The research behind why business development is so crucial to your firm’s success

Research from InvestmentNews’ annual benchmarking study shows that business development – a term for the formal prospecting and client acquisition process – becomes a necessary source of growth for independent advisory firms as they scale.

Our data shows that the practice gradually supplants traditional referrals, and the firms who succeed the most in this area distinguish themselves as the largest and most profitable firms in the industry.

(Is your firm a top performer? Find out now by participating in our 2016 benchmarking study: https://www.investmentnews.com/financialperformance)

Marketing vs. Business Development vs. Sales

The differences between marketing, business development, and sales can be subtle, and are worth enunciating. Marketing is creating broad awareness of the firm and its brand: think broad-strokes initiatives such as the firm’s website, print or online advertising, sponsoring or hosting events, and many other like-minded activities. Business development, on the other hand, is the specific targeting of new client channels (lead generation), the development of those channels and the process of converting leads into prospects (prospecting), and the shepherding a prospect into the sales environment. Sales is closing the deal: it is the art of the face-to-face meetings that converts prospects to clients.
When we distinguish between assets gained via business development and assets gained via referrals, we are drawing a line between assets that came to the firm via a direct referral from an established referral network and assets that came to the firm through business development activities (which can include the process of setting up referral networks).

What it takes to grow fast and be more profitable

As independent advisory firms get larger, firm growth – especially growing quickly – becomes increasingly difficult. In our studies, the smallest firms often achieve the highest paces of growth year in and year out, in large part due to the fact that adding a single relationship can often have outsize effects on their overall bottom line. But smaller firms traditionally rely heavily on referrals for gaining new AUM – those sources necessarily give way to business development practices as firms scale.

Evolving measures of success.

When looking at new AUM sources by both the size of the firm and firm performance, it becomes clear that top advisories first master the art of the referral, and then later do a superlative job of growing their reach through business development initiatives. But firm size is not the only determinant that shows a clear advantage to an uptick in business development: when we look at firms of all sizes, the most profitable in each group, or the firms we denote top performers, have a clear edge in terms of the amount of new assets that come to the firm via business development. The top firms evolve significantly to be the best at every level.

What are they doing differently?

To make this happen, firms undertake a number of strategic intiatives. For one, top firms spend more on their business development budgets; in fact, top performers in the $10M+ annual revenue group spend 50% more than their peers in the area. And top performing firms in general are more likely to set new business requirement goals at their firms for their advisers, and are then in turn much more likely to compensate based on new business development. This practice calibrates firm goals with those of their professionals, and in good times pays dividends for both parties.
That being said, it is one thing to make business development a requirement – and to compensate for it specifically with incentives – it’s another for firms to incorporate client acquisition best practices into their culture. Top performers are also more likely to have business development training for their employees, and it’s more likely to be formalized, rather than ad-hoc mentoring.

The bottom line

The largest firms generated 4.8% AUM growth – nearly 2/3 of their new business overall – from firm business development. Solo advisers and the smallest multi-professional firms, on the other hand, generated about 2/3 of their new business from referrals. If firms are either interested in growing their businesses into larger organizations, or simply reporting profitability rates among the top quartile of their peers, it is clear that growth must come dynamically and evolve past the passive referral process.
In our 2016 benchmarking study, which focuses on financial performance, we are for the first time collecting data around leads, prospects and closed relationships, which will allow us to delve deeper in our business development benchmarking. How does your firm fare in the realm of business development? Participate in our study to find out: www.investmentnews.com/financialperformance