Posts Tagged ‘Major Component’
Sunday, January 22nd, 2012
Advisor Collaboration is now a week old and we have attracted almost 60 members. This week, we are discussing a blog that we posted last week – “What’s The Compound Growth Rate Of Your Business and What’s That Costing You?” We updated our spreadsheet on this blog by adding a new front page to hide most of the numbers so it is less intimidating. This week’s discussion is “What would you need to do differently to achieve and maintain a 20%+ compound growth rate for your business?”
Here’s the math behind building a 20% growth rate:
Business development is a major component of achieving above industry average growth. The two biggest drivers of growth are new assets from new clients (roughly 14% per year) and new assets from existing clients (roughly 7% per year). Investment growth, in normal years, nets out against lost clients and distributions. The good news is that new assets from new clients and existing clients are under your control and dependent on client satisfaction. You do, however, need some help from financial markets to achieve 20% growth, otherwise lost clients and distributions claw back your growth.
Studies suggest that approximately 60 – 80% of new assets from new clients come through client referral. So if you have a $50 million AUM business, (average new client = $500,000) here’s the math:
- $50 million business
- Target growth of 21% (for calculation purposes) = $10.5 million
New assets from new clients (14%) = $7 million (14 clients) made up of:
- Client referral (60%) = $4.2 million (9 clients)
- Business development = $2.8 million (5 clients)
New assets from existing clients (7%) = $3.5 million
The key driver for client referrals and new assets from existing clients is client satisfaction. If you are not getting 8 to 11% annual growth in AUM through client referral and 7% through new assets from existing clients, you may need to improve your relationship management systems.
A good rule of thumb is focus on things that you control. You can’t control financial markets so focus on delivering a consistently superior client experience to drive referrals and new assets from existing clients. Budget time for business development activities (growing your client, personal and business networks) and use it effectively. Build a plan and then focus on the process, not the results and the results will take care of themselves.
The major message we have heard from advisors this week is “Sure 20% growth is easy when you are small, but it is impossible when a book reaches $50 – $100 million and it is even tougher when it reaches $300 or $400 million.” Lack of capacity and the resultant drop in client satisfaction cause advisors’ businesses to plateau. A bigger business should grow more quickly (unless you have $300 million of which one client has $200 million) because you have a broader base of clients who can refer their friends or colleagues. Just use the numbers above and do the math for your business. You will probably need to make some changes to grow at 20% but you may gain some clarity to allow you to achieve this goal.
About Bob Simpson
Synchronicity Performance Consulting has been coaching financial advisors since 1998.
Bob Simpson, president and founder of Synchronicity has been involved, directly or indirectly in the financial services industry since 1981. He has been a very successful financial advisor with Nesbitt Thomson Inc., a major Canadian financial institution. Between 1981 and 1989, he built a business with more than $120 million in assets under management and was one of the first Canadian advisors to build a team.
Tags: 5 Million, 50 Million, Assets, Aum, Business Collaboration, Business Development, Business Target, Calculation Purposes, Client Referral, Client Referrals, Client Satisfaction, Compound Growth Rate, Distributions, Financial Markets, Front Page, Investment Growth, Major Component, Math, Relationship, Relationship Management, Spreadsheet
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