The quest for growth in the financial advice industry is unrelenting, with independent registered investment advisors leading the charge. For years, this growth has been propelled in large part by the momentum of market gains and a thriving environment for mergers and acquisitions. However, the distinction between organic growth and market growth has never been more apparent, especially during periods of market volatility like we’ve experienced since the onset of the pandemic.
Schwab’s 2022 RIA Benchmarking Study delivers a sobering revelation — relying on upward market trends during turbulent times can drastically stunt the growth of a practice. This issue is magnified by a prominent industry voice’s comprehensive data analysis of the Schwab study, which revealed negative revenue growth for the average RIA firm over the last five years, excluding market gains.
Findings like the Schwab data have sparked discourse within the industry about the role of sustainable, organic growth in ensuring the long-term viability of an RIA. Unlike rapid expansion through acquisitions or mergers, organic growth focuses on building a stable and gradual increase in both client base and assets under management. This approach reduces the risks associated with choppy markets or changes in client sentiment.
With this in mind, let’s look at why many RIAs wind up scrambling to plug a “leaky bucket” of clients.
Achieving organic growth requires a balanced client portfolio across different life stages, with an emphasis on clients in the accumulation phase rather than those in the decumulation phase. This strategic emphasis on building a book of business with clients accumulating assets offers a multitude of advantages that contribute to the long-term success and viability of the RIA.
Clients in the accumulation phase provide a unique opportunity for compounding growth. As their assets increase over time, the potential for higher returns on investments becomes more pronounced. This not only benefits the clients but also leads to increased revenue and profitability for the practice, all while fostering enduring client relationships. As clients progress through different life stages, the advisor can provide continuous guidance and support, strengthening trust and building rapport over time — potentially resulting in greater client loyalty and referrals, which are pivotal for sustainable growth.
Conversely, a disproportionate concentration of clients in the decumulation phase can limit growth prospects since this aging demographic is utilizing distributions to fund their retirements. Prioritizing clients in the accumulation phase aligns the RIA's growth trajectory with the clients' financial journey, unlocking the potential for mutual success and a thriving, sustainable practice.
The graying demographic of financial advisors is another trend demanding attention. A study by J.D. Power found the average age of advisors has reached 57 years, a noticeable increase from the 2020 average of 54. Older advisors tend to have older clients, which can curtail organic growth — but ensuring that the next generation of advisors, or G2, are ready to carry on the business is critical. G2 advisors have a much different path to success because they're more likely to learn financial planning first and business development later, essentially a reversal of how an older firm’s founders got their start. A well-executed G2 transition is crucial for maintaining client relationships and ensuring continuity of the business while positioning the firm for organic growth long-term.
However, most RIAs aren’t well-positioned to recruit, hire and retain next-gen advisors. Why? Because they’ve prioritized taking cash flow from the business over building a sustainable, future-ready practice that caters to the unique needs of G2 advisors— including offering a transparent career path. The new generation of advisors wants to be mentored and given a legitimate opportunity to drive growth, not treated as someone junior whose role is often minimized during client or prospect meetings.
Lastly, there is the delicate dance of scalability and the client experience to consider. Growing a firm without sacrificing personalized service is a feat in and of itself. As a firm grows, maintaining the attributes that defined its initial success becomes paramount — however, increasing operational complexities along with other demands on the advisor’s time often jeopardizes this equilibrium.
Achieving scalability without undermining quality is a perpetual challenge. The notion of replacing dissatisfied clients with new ones forms an unsustainable cycle, putting long-term growth prospects in jeopardy.
For RIAs, the imperative is clear: pursue organic growth to avoid a never-ending battle of client attrition, akin to constantly struggling to plug leaks in a bucket. This endeavor involves diversifying the client base through referrals, digital channels, referral partners and workshops to fuel business growth. In addition, the firm of the future has to establish a steadfast reputation, deliver tailored services and foster enduring relationships rooted in trust. Where they suffer is understanding how to drive true organic growth, not revenue growth as a gift provided by bull markets. The firms that can deliver strong organic growth year after year are the most attractive places for G2 advisors to want to work.
The road ahead for RIAs involves steadfastly nurturing both new and existing relationships, ensuring a seamless generational transition and deftly striking the equilibrium between growth and personalized service. In this pursuit, the distinction between short-term surges and enduring success becomes palpable, reshaping the landscape of modern RIA growth.
Jason Gordo is co-founder and president of Modern Wealth Management.
Todd Bryant of Signature Wealth Partners on vanishing pensions, SECURE Act 2.0, and what clients really want to know.
Merrill's latest hires span Colorado to Louisiana, even as industry-wide recruiting data suggests the firm is losing almost as many advisors as it gains.
The $36 million buy allegedly hid inflated books and a $50 million diversion.
“An award citing emotional distress is very unusual,” an industry executive said.
New EBRI research found workers who participated in employer financial education reported higher confidence, literacy and financial satisfaction.
Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains
Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
