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Managing Director, RIA Client Experience, Business Development and Strategy
The path to growth for financial advisory firms is multifaceted. It requires a keen understanding of the changing demographic landscape, a balanced focus on customer acquisition and retention, and a commitment to leveraging technology and innovation. Additionally, preparing for future challenges, such as the changing counselor workforce, is crucial.
Gabriel Garcia, Head of RIA Client Experience, Business Development and Strategy at SEI, is part of the team sponsoring critical research and insights in the InvestmentNews Advisor Benchmarking Study. The Benchmarking Study offers financial advisors comprehensive practical management studies and benchmarking reports, presenting invaluable insights into industry trends and performance metrics.
Garcia points out, “The top three things clients are looking for are peace of mind, goal achievement and life fulfillment. Communication strategies and making sure there’s a plan to meet those expectations are critical. The elixir to all of this is growth, right?”
The study revealed in 2023 an average growth of 8% in client relations among consulting firms. Garcia, however, points to the misleading nature of such a figure, noting, “The detailed data reveals that individual advisors within these firms average approximately 0.62 clients per month, which translates to just over 7 clients per year. While on an aggregate level, this this could contribute to a significant percentage growth for the company, these averages and medians can be somewhat misleading.From a performance point of view, an acquisition rate of 0.62 customers per month could be considered suboptimal.
“Improving this rate from 0.62 to one customer per month represents a 40% increase. While this might seem like a daunting task at first, it is quite achievable with the right strategies.”
Key to this growth is diversifying customer acquisition methods beyond traditional reliance on referrals. While referrals have historically been a primary source of new customers, expanding marketing initiatives and exploring new avenues for customer engagement can significantly widen the pool of potential customers.
By broadening their reach, advisors can effectively increase their client base, thereby improving the overall growth and vitality of their practice.
Navigating demographic changes
The industry, traditionally dependent on a baby boomer clientele, is now at a pivotal point. As boomers transition from wealth accumulation to wealth distribution, advisory firms must pivot their focus to younger generations – Gen X, Millennials, and the emerging Gen Z. Firms should focus directly with younger demographics, such as independent clients. This approach is a more strategic initiative to become the preferred advisor of these next generations, instead of just relying on their connection to the children of current clients.
Garcia says, “Companies must intentionally diversify their relevance to different demographics. Expectations surrounding the wealth transfer of baby boomers may not materialize as anticipated, given their increased longevity and shift from accumulating to spending their wealth.
“This wealth transition involving the children of current clients presents a challenge. Statistics reveal that 90% of heirs do not retain their parents’ advisors. Therefore, it is debatable whether aiming to become the advisor to children before $70 trillion of wealth transfer is practical.”
The way forward
The perception of financial advisors is often limited to their investment expertise, but their role encompasses much more, especially in guiding clients to achieve their goals and stay on track with their financial plans. The main focus for advisors should be on these aspects, as they are directly controllable, unlike external market forces.
Garcia says, “Linking it back to the top three things that investors are looking for – should be at the forefront of an advisor’s value proposition. Behavioral science suggests that people tend to underperform financially when left to manage their investments independently, due to an emotional decision. Therefore, the emotional value advisors bring in helping clients navigate turbulent times is of utmost importance.
The trend towards hiring more staff in service support and operational roles, particularly evident among top firms, is a strategy to manage increased client loads effectively. These leading firms handle 40 to 50% more clients than their peers, indicating a high level of efficiency and client engagement. However, reaching a point of maximum elasticity in terms of customer management capability indicates the need for these firms to consider expanding their teams to sustain growth and service quality. The most important barrier to further growth is this capacity limitation, emphasizing the need for strategic hiring to create additional bandwidth for customer management and acquisition.
In booming markets, AUM usually experiences robust growth, while in downturns, there are declines. In 2022, the average financial advisory firm in the study experienced a net decline of 7.4% in its AUM. The 7.4% drop in AUM, while notable, is not particularly alarming, according to Garcia, given these market conditions. On a positive note, firms have attracted new clients and increased their share of wallet from existing clients, which somewhat offsets the impact of the decline in AUM on revenues.
However, Garcia notes, the decline in AUM presents a potential future concern. In particular, there is a shift in where new clients originate, with 37% now coming from other independent advisory relationships, a significant increase from the historical norm. This trend suggests a possible increase in attrition rates, which could become a considerable challenge for the business, moving beyond mere market navigation to strategic business management.
While new customer acquisition is crucial, retaining existing customers is just as important. The data shows that a significant portion of new clients are switching from other advisory firms, indicating a competitive landscape where client loyalty can no longer be taken for granted.
“This difficult time is where companies need to think about their marketing, their branding and their presence in their community. When the turbulent markets calm down and we get back into the upward market trends, then there will be an availability of new investors. Customers who may have terminated their advisor or who have come out of a difficult period and were dissatisfied because their advisors did not implement the key engagement strategies and were based on goals,” says Garcia.
Information provided by Independent Advisor Solutions of SEI, a strategic business unit of SEI Investments Company (SEI).