Reemerging with growth strategies

In 2022, the wealth management industry faced a whirlwind of challenges, ranging from unpredictable markets to rising costs. Advisory firms, however, demonstrated resilience by clocking an 8% growth in client relationships. Yet, beneath these encouraging numbers lie deeper insights and trends.

The 2023 InvestmentNews Benchmarking Study sponsored by SEI provides critical research to help financial advisors in practice management. Shauna Mace, Head of Practice Management Independent Advisor Solutions by SEI provides insights on some of the key findings in the comprehensive research.

Sustaining growth

Advisory firms have historically ridden on market performance to augment their assets under management (AUM). The recent data, Mace reveals, however, indicates continued challenges in new client. The primary driver for these new client additions has always been referrals. It’s evident that for consistent and long-term growth, advisories need diversity and to bolster their organic growth strategies, including leveraging traditional marketing avenues.

Furthermore, while advisory founders have been instrumental in propelling firm growth, the looming retirement of a significant chunk of advisors underscores the urgent need to nurture the next generation.

Retaining clients in these tumultuous times requires an intentional shift in communication, in terms of what is communicated, how it is communicated, and the volume of communication. Mace maintains, clients value progress towards their goals and relationships built on trust. Advisors need to guide conversations beyond mere financial metrics, delving into clients’ aspirations, fears, and success parameters. As market volatilities surge, consistent and proactive communication is paramount, reminding clients of the long-term approach to wealth management and goal management.

In terms of financial management, the study highlights the importance of closely managing expenses to maintain profitability. The disparity between top-performing firms and their counterparts can be attributed to prudent financial management. While revenues remained stable amidst market volatilities, top performers were astute in managing their expenses.

Mace highlights, “What caught my attention however, when analyzing the specific statements was that the leading companies in each category didn’t augment their expenditures, with the exception of one area: marketing and development. It prompts the question of whether these firms ought to be channeling funds into other crucial aspects, such as advisory or professional staff. Yet, it was noteworthy that the one line item in the income statement where there was a noticeable uptick was in marketing spending.”

Engaging new clients in a volatile environment

The study found firms on average added 5.8% more clients to their list in 2022, but unfortunately also on average lost 2.7% of their existing clients. It appears that market volatility and expectations of a recession hurt not only the assets but also the referral activity of both existing clients and centers of influence.

Fear and uncertainty are often paralyzing, preventing individuals from taking action – a trend clearly observed during COVID. Data from that period shows that many firms were stagnant, merely holding their breath, adopting a “if it isn’t broken, don’t fix it” attitude. This behavior mirrors that of many clients who prefer to wait out the storm rather than make significant changes during tumultuous times.

As Mace says, “People take action when there’s enough of a need for them to. When it gets to a point where they can’t not take action anymore.

“The job of the advisor, is to create a conversation that’s not simply focused on the markets but to educate their clients or prospectives around the impact of good habits and behaviours as it relates to their finances and the impact that can have.”

Gaining scale, capacity and efficiency

Figuring out how to maximize efficiency and productivity while utilizing fewer resources is a common challenge for advisories. “The largest driver of expenses is people. So how can you get the most out of your people?” asks Mace.

The top-performing firms in the study achieved an average operating profit margin of 43.5% —more than double the average 19.1% profit margin among all other firms. The difference in profitability is due to productivity. In the top performing firms there are 49 clients for every team member versus 31 for all other firms.

She further notes, in the study, the number one tactic firms identified (an impressive 76% of survey responders) in planning to implement and implementing enhanced efficiency and scalability was the use of either defining or refining process and work flows. The second was investing in new technology.

This is a route Mace observes being taken by the most operationally efficient and successful firms as they work to define their processes. In particular, the core, repetitive ones such as onboarding, client reviews, and money movement. They are not just defining these processes, but also leveraging their CRM systems and other technological tools to operationalize these processes and workflows. This, in turn, is boosting their capacity and productivity, as evidenced by the productivity metrics highlighted in the study.

Finally, the study revealed the evolving role of operations in advisory firms. The increasing value of operational roles and the steady increase in compensation for these positions reflect the industry’s recognition of the importance of operations in achieving efficiency and scale.

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI).