While firms increased their assets under management by 18% in 2023, this figure does not account for market growth, which was at 11.4%, according to a new study conducted by Ensemble Practice and BlackRock.
However, new client AUM, which grew an average of 7.5% in 2023, speaks more to the health of an adviser's business, said Ensemble Practice CEO Philip Palaveev. And when you factor in customer churn (-1.8%), organic growth was just 5.7%. That's low considering most firms he talks to say they expect 10-15% growth.
“For a long time, in many conferences, in many talks, even in research papers, we will emphasize the growth that is generated by the markets and we will call it 'organic growth,'” Palaveev said. “It's time to take markets out of the equation and face the reality that, at least in the last five years, we haven't had good growth. We have a growth problem.”
The True Ensemble Data Insights 2024 survey was conducted in April and May 2024, with BlackRock and Ensemble Practice gathering data from 240 advisory firms about their business growth, profitability and employee compensation. This first report focuses on organic growth.
Palaveev says the average organic growth rate doesn't tell the whole story; if you look at the distribution of growth results, you have 21% of firms growing new AUM by 11%. However, more than half of firms are growing at 3% or less.
“If we take them (fast-growing firms) out of the equation, the rest of the firms are actually growing no faster than 3%.”
To grow, firms must realize that marketing, like investing, must be a vital function of the firm, he says.
“In most industries, this will be elementary,” Palaveev said. “You don't need an MBA to come to that conclusion. But in our industry, we don't trust marketing and we don't invest enough in marketing. In this report you will see that firms are spending a minimal amount of money on both marketing budgets and marketing staff. Marketing as a function is barely emerging, even in the largest firms.”
Survey respondents said they spend an average of just 1.4% of their revenue on marketing and 0.7% on marketing employee compensation.
On average, consulting firms spent 1.4% of their revenue on marketing and 0.7% on marketing employee compensation. Even large firms (those with $1 billion plus in AUM) spend only 0.9% of revenue on marketing department compensation, which comes to about $114,000.
A good rule of thumb in many industries is that approximately 5% of revenue should be invested in growth – essentially marketing.
Palaveev says there is data showing that firms that spend more on marketing actually grow faster.
The report also looked at the sources of leads coming to consulting firms, with referrals from existing clients winning at around 58%.
“That's the way it should be,” he said. “This is a sign of strong relations. This is the sign of a firm that does a very good job for its existing clients. This is a firm that really makes strong connections. This is wonderful. But once again, this is slow.”
This was followed by referrals from influencers, networks and marketing executives, with 9.5%.
“This is essentially generated data that is not associated with a person,” he said. “Instead of someone calling and saying, 'Hey, can I talk to Philip.' They call and say, 'Hey, can I talk to the Ensemble, whoever's available?' This is a marketing direction.”
The importance of those marketing directions is growing slowly but gradually. Palaveev said he has seen that number rise from about 0% in the 1990s to nearly 10% now.
“I suspect this is the number that will be the most important industry trend.”
“They say in elections, 'every party has to get its own party members to go and vote and then try to get as many independents as possible.' This is almost the same thing. Every firm should get its members – in other words, existing customers – to refer as many as they can. And then try to get as many freelancers as possible. That's the marketing part.”
These marketing leads should not replace referrals from existing customers, but will be the means of accelerating growth, he said.
If you look at organic growth rates by size, the study found that small firms grew new client AUM by 12.9%, while large firms grew by 5.2%. Palaveev attributes this to the 'denominator problem'.
“The denominator problem is simply, if you have $100 million in assets, to grow 10% you need $10 million; $10 million is, say, 10 clients, $1 million each. Sounds doable. If you have $1 billion in assets, to grow by 10% you need to bring in $100 million. There are 100 customers. Suddenly to grow at the same rate, because we're measuring growth by percentage, you have to bring in a lot more customers.”
At the same time, large firms have larger marketing budgets, more existing clients to refer, and more advisors to network and referral relationships with caregivers.
Palaveev argues that the lower growth rate is also likely related to larger firms' focus on mergers and acquisitions, at the expense of organic growth.
“The big firms today have fallen too much in love with acquisitions as a growth strategy and perhaps neglected organic growth because all the big firms are pursuing acquisitions,” he said. “The denominator problem is a problem, but then again that big truck has to have a much bigger engine. And maybe that engine is currently busy with M&A.”