Two Changes to Empower Organic Growth

By Angie Herbers

In February, I had the pleasure of presenting at NAPFA’s Large Firm Forum in Fort Lauderdale, FL. My topic: organic-growth pain points.

While my presentation was aimed at larger organizations, I believe that two pain points are relevant to midsize and small firms as well. When firm leaders think of pain points in relation to organic growth, they often think of things like marketing programs, finding and training talent, investing in additional technology, and training future leaders. But there’s another way to frame the idea of pain points: They are points at which we need to change our perspective to push past potential growth plateaus.

Solution #1: Target Mass-Affluent Clients

The first shift in perspective that can benefit advisory businesses concerns the profession-wide competition for the wealthiest clients. New financial advisory firms typically start gathering assets by accepting a wide range of clients. Once they reach a critical mass, somewhere around $1 million in annual revenue, they become pickier, narrowing their focus to high-net-worth consumers. As a result, their client base grows more profitable, producing, on average, around $9,000 a year in fees per client.

But it’s here that a potential growth plateau looms. The challenge is supply and demand. As the independent advisory profession has grown and as Fee-Only firms have multiplied, these businesses have focused their attention on the high-net-worth consumer. The problem is that there’s a finite supply of these consumers.

There are roughly 22 million consumers in the U.S. with a net worth of at least $1 million. That cohort, which most advisory firms covet, represents only 16% of the U.S. consumer population. And if you divide those 22 million consumers by the number of SEC-registered advisory firms in the country, it works out to about 1,500 high-net-worth clients per firm. That doesn’t mean that your firm will eventually run out of prospective clients in this wealth tier. It just means such clients will become harder and harder to land, due to intense competition.

One powerful way to push past this pain point in your growth process is to expand your target market toward the mass-affluent market of people who have less than $1 million in assets. Making inroads with this market means accepting a lower average account fee. Your average annual fee per household might fall from $9,000 to $7,500 or even $5,500.

Growth that begins with a willingness to lower your average fee is highly counterintuitive for most advisors. But the mass-affluent market is the largest consumer market, meaning competition for these clients isn’t as fierce. And it’s important to understand why working with them can be a smart longer-term business decision.

Mass-affluent households aren’t going to be firms’ most profitable clients in the first two or three years of the relationship. But over time, they’ll become growth drivers. The key for advisory firm leaders is to shift their thinking: If you want your firm to grow sustainably, envision those mass-affluent clients in three, four, or five years from now. Over that period, they’ll be saving money, building retirement assets, and, in some cases, receiving inheritances. Their account sizes will grow, which will push advisory fees higher.

At Herbers & Company, our consulting firm, we explain to our advisory-firm clients that 40% of their client base at a given point in time should have less than $1 million in AUM. If that’s the case, then most of a firm’s future growth will be driven by contributions to existing assets rather than the need to continually add lots of new high-net-worth clients. You might think of adding smaller accounts that will mature into larger ones as akin to building a bond ladder with differing maturity dates.

Solution #2: Add a New Service

A second way to push past a potential growth slowdown is to add an additional service for your clients. Again, this applies to firms across the size spectrum. Over the past years, we have seen tax planning become the number one organic-growth opportunity for financial advice firms. Unfortunately, it’s also a major pain point for these firms. The reason is that firm leaders believe they need to have a CPA on staff to provide tax planning. This is another area where a willingness to adjust your perspective can be very profitable.

The tax planning services that financial advisors provide are distinct, legally and in practice, from the tax advice and tax preparation offered by CPAs. If advisory firms plan to offer tax advice, they absolutely need a CPA. But tax planning has been shown to generate organic growth in several ways. By helping to minimize clients’ tax liabilities, it increases asset accumulation rates. It decreases withdrawal rates, in part because clients don’t need to cash out assets to pay larger tax bills.

Providing tax services can directly increase revenue in cases where they are provided in exchange for a fee. If tax planning is used as a loss leader, on the other hand, it can spur higher levels of new client leads. And tax planning can boost referral rates from existing clients.

In addition, providing tax planning can potentially help firms develop deeper relationships with CPAs who might be overwhelmed with capacity issues and unable to build tax planning departments within their firms. (It’s important to understand that tax planning is different from tax preparation. Preparing tax returns can be a time drag, as explained in “Incorporating tax preparation or tax planning into your practice: the good, the bad, the ugly” in the November 2022 NAPFA Advisor.)

Herbers and Co. has been tracking the CPA market for the past five years since it became clear that a critical shortage of licensed tax professionals was building. Capacity shortages in financial businesses that are adjacent to wealth management tend to present opportunities for financial advice firms. Financial advisors are uniquely positioned to provide strategic tax planning, specifically, helping clients prepare for periods when their income is increasing or decreasing.

Shift Perspectives to Grow

In terms of growth, the most effective growth levers, regardless of firm size, have to do with leaders’ willingness to shift their perspectives. By diversifying a client base so that 40% of your accounts are mass-affluent households and by incorporating tax planning into the client experience, organizations can set themselves up for strong, sustainable growth over the long term.

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Angie Herbers is managing partner of Herbers & Company, a consulting firm to independent RIAs. You can reach her at angie@angieherbers.com.

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