Written by: Jack Martin | Elite Advisor Group
It's time to speak out.
The wealth management and financial advisor growth engine is broken. The wave of M&A is making it worse. Our customer experiences fly over many clients' unique apprehensions and concerns.
Our firm has historically worked behind the curtain to help institutions build stronger relationships with advisors and affluent consumers. However, there needs to be an open conversation about organic growth and where RIA buyers and sellers should move.
Many industry leaders are talking about facets of organic growth. This article launches a forum to explore a 360-degree view of the problems, challenges, and organic growth opportunities facing buyers and sellers in the wealth management and investment advisor space.
Can we stipulate that there's an organic growth problem?
- Mark Tibergien's last CEO event offered a stark reality: organic growth rates for wealth management firms have been dwindling for years, with net flows stagnating at 2.4% and a decade-long average barely reaching 3.7%.
- Simultaneously, a $170 trillion money-in-motion tsunami of consumer demand for advice is rolling over a shrinking advisor population.
- Will this rising tide lift all boats or swamp them? Why can't firms grow when demand for their services is skyrocketing?
Our view: Innovation is required.
- Consumers are smarter and have access to more information. Their expectations about dealing with an advisor don't resemble what advisors have seen before. They expect their experiences to be personalized. And they don't want to be sold.
- Their actions speak volumes. We can see what they want in their searches and buying preferences. We can see what they don't want. Surviving spouses, children, and grandchildren are discharging legacy advisors at an alarming rate.
- The existing advisor marketing apparatus needs disruption to keep pace with post-COVID customer expectations and the current opportunities. Stephanie Bogan and I had a great conversation about "creative destruction" on a recent podcast. We need more of that.
- Solutions are within our grasp, but they will look different from the traditional referral or marketing approaches we see today. They will be built around changing mindsets, data, intelligence, behavioral science, and transformational IQ.
- To optimize valuations and competitive advantages, buyers should build growth platforms to provide access to scalable, repeatable processes with facilities for growing the business development and experience teams that will be required. Buyers should guard against being echo chambers for yesterday's methods. Changing old mindsets and behaviors to fit new realities will require special attention.
- Growth isn't measured solely in terms of dollars or percentages. Growth should also be measured in terms of changed lives. This is about the people we serve. Millions of potential customers are not engaging today because of the judgment and shame built into the experience of "coming clean" about money. Their need to be heard about their financial concerns and emotions can be met. Humanizing the customer experience will profoundly impact ROI and profitability, but they are currently not prioritized and are relegated to the kids' table. Humanizing our customer experiences may be the most significant growth lever.
Why now? The Opportunity.
The financial advice and wealth management opportunity has never been greater. Just consider the rising demand due to $170T MIM, an aging and shrinking advisor base, and the many increasingly complex tax, longevity, health, and legacy issues facing affluent families shape the need for sound financial advice over the next 20+ years.
At the same time, the advisor population is shrinking. There is more demand for advice and fewer capable bodies to provide it. This opportunity is less like a rising tide and more like coastal flooding.
The Significance of Organic Growth
Organic growth is not just a KPI for buyers and sellers within the wealth management sphere—it's a critical determinant of value and potential. David DeVoe noted that a mere 1% increase in growth could amplify a firm's valuation by 7%.
On a panel last fall representing seasoned acquirers like Carson, LPL, and Steward, Jim Gold from Steward Partners encapsulated this sentiment, stressing the importance of "sustainable future revenue growth" in potential partnerships and acquisitions.
Growing assets, adding new billable services, going upmarket, and client acquisitions drive future revenue growth.
The 1% > 7% ratio may be understated.
- Consider the recent eye-popping multiples buyers are paying now to acquire firms. Many deals are landing at 1 ½ to 2 times historical prices. And when today's buyers become tomorrow's sellers, growth rates will be even more valuable.
The Challenge of Entropy
However, the path to achieving this coveted growth is fraught with challenges, including entropy. The second law of thermodynamics metaphorically applies to the wealth management industry, where the energy and drive to grow can diminish over time. Entropy is particularly evident when founding rainmakers sell for large up-front payments, successors exit to start their firms, leading to a loss of talent and motivation, and when firms are acquired, potentially stalling motivation due to resolving succession concerns through upfront payments.
Mark Hurley's big reveal at last year's Market Counsel event was more like a scene from "The Emperor's New Clothes." The party may be over. Buyers and sellers may need to consider a new economic model for deals. Achieving humanized hyper-growth may be the ace in the hole.
So what do you think?
So, let's start: what's your firm's (buyer or seller) growth platform? What's your growth operating system (Growth OS)? What are you doing differently today to drive growth? What do you wish you could do? What's worked for you, and what hasn't? What does success look like?
Related: Comparing Consumer Delinquency Rates