Unleashing Organic Growth: The Essential Truths Every Financial Advisory Firm Must Embrace

Kevin O’Leary (aka ‘Mr. Wonderful’) is one of my favorites on Shark Tank. I don’t always agree with his delivery, but he never fails to ask tough questions that a good board member would ask of any financial advisory firm CEO. Two of his frequent areas of inquiry revolve around customer acquisition costs and the lifetime value per customer. And given our industry’s increasing focus on organic growth, every firm owner should be taking time to ask and answer these two questions. Invariably, the resulting data points illuminate two essential truths:

1. Just how low the firm’s client acquisition costs truly are; and

2. Just how high the lifetime value of each client truly is.

Understanding the lifetime value of a client (CLV) not only helps you make more informed decisions about resource allocation and marketing strategies but also underscores the importance of client retention and the economic impact of each client relationship. How impactful? Take a look at some key CLV statistics and insights from my good friend Michael Kitces of Nerd’s Eye View and Advisor Perspectives:

• Revenue and Profit Contribution—The average lifetime value of a client with $1 million in AUM and a 1% fee, assuming a 20-40% profit margin and a retention of the client relationship for 20 years, will generally range somewhere between $40,000 and $80,000. Twenty years is the typical client duration for a firm with a 95% annual client retention rate. The total lifetime revenue from that client will be about $200,000 ($10,000/year x 20 years), assuming no market movement. That’s a big assumption, but most expect the market to increase over twenty years. So, these estimates are relatively conservative.

• Impact of Retention Rates—Improving client retention rates can significantly boost each client's lifetime value. This seems obvious, but it’s important to highlight the impact of every bit of retention success, including retaining clients multi-generationally.
• Marketing and Acquisition Costs– despite the high CLV, firms typically only spend about 2% of revenues on marketing. For example, to grow 10%, a firm with $100 million AUM must add $10 million in net new assets (bringing in $100,000 in new revenue and lifting CLV from $400,000 to $800,000 or more). Yet historically, that firm will only spend around $20,000 annually on marketing to acquire these clients. Alternatively, firms with client acquisition costs dialed in comfortably spend 5-7% of gross revenues on marketing – aware that future revenue and CLV more than justify the investment.

It's crucial for firms to efficiently and effectively spend on client acquisition if the goal is to grow organically. Relying on growth from the capital markets or solely through acquisitions is a less durable strategy. Our industry will increasingly focus on organic growth to measure a firm’s success, especially when calculating its enterprise value. Let’s peel that onion, called organic growth, a bit further. The best in our business measure net new assets, excluding growth from capital markets and acquisitions. Additionally, these firms are bifurcating net new assets added from existing clients and what is coming in as “net new.” By managing your real acquisition costs effectively and understanding your actual “net new” asset growth, you can reinvest in services that enhance client retention and satisfaction, thereby increasing lifetime value.

The Role of CLV in decision-making  

Quantifying and understanding a client's actual lifetime value provides tremendous motivation to prioritize client retention. After all, retaining existing clients is significantly less costly than acquiring new ones, and focusing more attention on high-value clients can dramatically enhance firm profitability. Identifying precisely which clients contribute the most to your firm’s profitability allows you to make smarter resource allocation decisions – potentially resulting in deeper relationships and increased referrals and introductions from loyal client advocates and their other trusted advisors.

Understanding CLV also allows your firm to craft more strategic marketing plan targeting high-value clients and nurturing existing relationships to help improve retention rates. Simply put, the higher your CLV, the more you can afford to invest in vital annual marketing expenditures.

Many advisors claim strong organic growth. Few actually achieve it (relying instead on the performance of capital markets to drive revenue growth).

Keep in mind, however, that accurately measuring CLV involves understanding the entire client journey – from acquisition to retention to serving their families multi-generationally. Enhancing client experiences at each touchpoint can lead to higher satisfaction, increased referrals and introductions from loyal client advocates, and, ultimately, improved retention rates. However, to truly understand how your firm maintains client relationships, you must carefully track client satisfaction scores and retention costs. High satisfaction scores directly correlate with lower churn rates and a higher CLV.

The most successful advisory firms, growing organically and not just acquisitively, have a demonstrated track record of significantly enhancing profitability and long-term success by focusing on retaining high-value clients, improving client satisfaction, and strategically investing in marketing. Better understanding and leveraging CLV will help you make more informed decisions that align with business goals and client needs – ultimately driving growth and stability in an increasingly competitive market.

Coaching Questions From This Article

1. How do your leaders report the detailed breakdown of your current client acquisition costs, including marketing, sales efforts, and onboarding processes?

2. What specific strategies have you implemented to optimize and reduce client acquisition costs while maintaining high-quality client engagement?

3. How do you currently calculate the lifetime value of a client, and what key factors do you consider in this calculation?

4. What initiatives are in place to increase the lifetime value of your clients, and how do you track the success of these initiatives?

5. How do you ensure that your spending on client acquisition is justified by the lifetime value you expect from your clients?"

6. What metrics do you use to assess the balance between client acquisition costs and the lifetime value of your clients, and how often do you review these metrics?

Client Acquisition and Retention:
7. How do you envision evolving your client acquisition strategies to increase efficiency and enhance the lifetime value of each client over the next five to ten years?

8. Looking ahead, what innovative approaches can you implement to deepen client relationships, improve satisfaction scores, and ultimately increase client retention and referrals from loyal client advocates and their other trusted advisors?"

9. What retention strategies can your team demonstrate that significantly increase client lifetime value?

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