The cost, complexity and cyclical nature of mergers and acquisitions put organic growth back in the spotlight for VNR. But our industry doesn't do a good job of talking about one big advantage that organic growth has: it puts advisors in the driver's seat.
If you prove you can acquire new customers and increase portfolio shares with your existing book of business, you pave the way for sustainable expansion and reduce the need to rely on inorganic growth. Easier said than done? Absolutely. But the truth is, RIAs don't have any quick answers to growth. M&A requires a skillful handling of integration, capital allocation and regulatory complexities. referencealthough valuable, are unpredictable and Can not provide the only source of growth. An organic growth strategy requires patience, strategic foresight, and a relentless focus on customer acquisition and brand development.
M&A activity has increased in investment advisory firms registered over the last decade, while organic growth rates have declined. At last year's DeVoe Elevate Conference, CEO of DeVoe & Co. David DeVoe cited industry data, saying the overall average RIA growth rate was 23% in 2017—but only 9 percentage points of that figure came from organic growth. The organic growth rate dropped to 7% in 2018, 4% in 2019 and 3% in 2020, and then increased to 4% in 2022.
While analysts predict a strong year for deals in 2024, M&A takes time. Buyers and sellers have to find the right fit, and buyers appear to be much pickier than they might have been in a low interest rate environment. A buyout firm recently told me that they can eat 100 lunches before they find the right firm to buy. It's a lot of shots in the dark.
Customer retention is another hurdle in M&A. Customers may be wary of changes in the quality of service, personal relationships or general direction of the merged entity. Acquired directors will also want assurances that their new firm has the tools to help them achieve their profit targets.
Building long-term sustainability
On the other hand, it's not like a solid organic growth strategy is a shortcut. Establishing trust and credibility in a crowded marketplace requires a thoughtful marketing strategy, strong prospecting and customer education initiatives, and a commitment to delivering exceptional value.
In addition, organic growth requires skilled and experienced marketing and sales operators. Competition for skilled growth operators can be just as fierce as for financial planners, and firms should consider investing in recruitment, training and employee development to help ensure a high level of expertise and service delivery.
So why bother? If both growth channels take time, why devote energy to the one that represents a smaller portion of overall VNR growth?
Organic growth emphasizes customer acquisition – and customers are the foundation of your business. Conversely, a retailer who has neglected their organic growth strategy is unlikely to find the multiple they were hoping for. Weak-handed buyers can be forced to pursue vendors contrary to their culture and business needs, with obvious consequences for customer outcomes.
The resources and technology poured into an organic growth strategy allow an RIA to dictate the terms of its future. The conversation changes from “How can I survive as a business?” in “How can I build on my success?” And a strong organic growth program can also attract top-quality, next-generation advisors. Young talent and potential successors want to work in an environment that plans for long-term sustainability. Organic growth creates this environment.
Additionally, the expected transfer of wealth from baby boomers to their adult beneficiaries creates new urgency for RIAs to optimize their client acquisition strategy. With so much money on the move and so many prospects in need of guidance, successful firms must carefully consider their growth protection. Generating high-quality leads is only one step in the process. Successful firms must sharpen their qualification process to help identify the most conversion-ready prospects.
Above all, organic growth strategies require patience. Results will not come overnight. But the same can be said for the rest of an RIA's growth channels. Of all the options, organic growth allows advisors to maintain the most autonomy and freedom from relying on the luck or whims of deal partners.
Daniel Gilmartin is Head of Marketing at Catchlight