The Financial Advice Industry’s Quest for Organic Growth

For much of the financial advice industry’s history, advisers and investment managers have struggled with organic growth – not just how to achieve it but also how to define it and measure it. In this article, we explore why organic growth should be a high priority for financial advice firms. We’ll cover the following key topics: How we measure and define organic growth; what good organic growth looks like; some common approaches to improving organic growth.

Organic growth is a new concept in wealth management

To understand many advisers’ complex history with organic growth, one would need to trace the history of the industry back to its roots.

Some 20 years ago, most advisers were tied sales agents for large life insurance groups. Their income came from commissions on sales of products invested in life insurance structures. Tracking inflows and outflows was not a meaningful exercise because, first, end clients were contracted with product providers and life insurers — not with advisers. And second, commission payments were linked to original product/contract value with inflows and outflows having no meaningful impact on an adviser’s take-home pay.

Then, in 2013, the Retail Distribution Review outlawed commission payments and forced life insurers to open their trading infrastructures to third-party products. In response, advisers shifted towards a direct assets under management (AUM)-based fee model with their end clients. This change tied their fate to the ebb and flow of AUM.  

The struggle for organic growth has been an ongoing issue in the industry, exacerbated since last year due to uncertain macroeconomic conditions and additional administrative burdens arising from Consumer Duty. Before that, the principal preoccupation of many advice firms, especially the larger national ones (variously called ‘aggregators’ or ‘consolidators’), was roll-up consolidation. Growth through acquisitions was deemed easier to achieve than was organic growth, and many shareholders actively encouraged rapid scale-build over capability-build in anticipation of a quick exit.

In previous insights, shared in our wealth management series, change in economic situations have pushed the topic of organic growth much higher up on the C-suites’ agenda. Investors in financial advice businesses are already spoiled for choice, with more than 40 private equity-backed UK advice firms competing for their money and attention. Why should they back one over another? What steps can be taken?

Step 1: Defining organic growth

What counts as organic growth — other than simply ‘not M&A’? At L.E.K. Consulting, we have a standard framework that helps our clients understand their organic growth profile (see Figure 1). 

This offers our clients a way to 1) baseline and track their organic performance and 2) identify meaningful levers for improvement.

For example, it is common practice for financial advice firms to consider ‘new business’ income (aka initial income) as organic growth, and some advisers’ renumeration formulae disproportionately reward new business income over recurring income.

So far so good. But we would argue that new business is a far-from-perfect measurement of organic growth. In reality, because it contains such a large number of one-off fee incomes (e.g. pension review, annuity advice), it is quite far from measuring what it purports to measure. Worse still, the focus on new business creates distorted incentives for advisers to place more attention on products and investments as opposed to savings goals and top-ups. 

Step 2: Measuring organic growth

Generally, a prerequisite to any improvement is knowing where you are today. Likewise, to improve organic growth, businesses must understand how they are performing right now. But that is easier said than done — especially when most financial advice firms do not have a track record of measuring inflows and outflows. Many are also not adequately tracking how much their clients are actually paying, despite requirements from MiFID II that they do so.

In our experience, advice firms have created such data in the following ways using specific approaches (see Figure 2): 

Approach 1: Aggregating from platforms

This approach recognises some inherent constraints of widely used practice management software (e.g. Intelliflo, Iress) in capturing organic growth data. Instead, these software providers seek to work around these issues by creating direct data feeds from platforms that are underlying custodians of client assets.

Advice firms that have their own proprietary platforms, such as Saltus, have an advantage here, as inflows and outflows data is already logged.

Approach 2: Back-solving from cashflows

With this approach, the finance department registers the increase in client fee intake from platforms. Organic growth is then back-solved from pricing and the estimated impact of asset appreciation.

The advantage of this method is it does not require extensive additional data collection beyond current norms. The significant downside is that it is highly inaccurate and relies on an accurate understanding of client pricing, which, sadly, most advisers do not have.

Approach 3: Back-solving from change in asset base

This involves taking asset value at two points in time, and then back-solving flows from the estimated impact of asset appreciation.

Intelliflo’s biggest drawback is that it can capture asset valuation only at a single point in time, and this is automatically overwritten when new valuation data is available. Advice firms must build their own data warehouse in order to create consistent historical data sets.

The question of yield management is another interesting topic in its own right. We posit that most advice firms actually still do not have a good handle on how much their clients are paying and how this translates to yield. This problem, again, comes from poor capture and quality of client-level asset data.

Step 3: Baselining your organic growth performance

Our work in the wealth management sector has revealed wide variations in organic growth performance. A ‘fair’ performance is 3%-4% p.a. of net flows, a ‘good’ performance would be 5%-6% p.a., and a ‘outstanding’ performance would be 7%-8% p.a., if not more.

Our findings indicate that, unsurprisingly, most advice firms are in the fair category, and some are in the good category. Few are achieving a rating of outstanding (see Figure 3).

We cannot overstate the impact of good or outstanding organic value creation on business growth and profitability. Financial advice firms, in our experience, have the potential to increase operating profit by as much as two to three times by implementing organic value creation strategies without needing to expand their adviser base (see Figure 4). 

What can wealth managers do to improve their organic growth performance?

Achieving outstanding results is not difficult either. In our view, the contribution of 7%-8% is possible with the right understanding of the composition of this growth. Below is a sample roadmap for achieving a 7%-8% organic growth rate by setting the right targets for your organisation.

There is no magic bullet in organic growth. It requires focusing on six key areas of your business with 80% effort. Those areas with some illustrative examples include:

1. Customer insights and segmentation: Make better use of fact-finding data to enrich understanding of client needs and revenue and profit potential
2. Yield and revenue management: Reduce yield dispersion and align yield to headline pricing as much as possible
3. Adviser segmentation and capacity management: Establish a clear division of labour between advisers — ‘hunters’ vs ‘farmers’ and senior vs junior
4. Centralised lead generation: Create centralised marketing, lead generation and management capabilities to ‘feed’ advisers
5. Referral management: Maintain proper tracking and incentivisation for referrals
6. Management information (MI) and incentivisation: Create the right MI and align incentives with MI (these are critical facets — all above means nothing if the organic growth performance cannot be measured and tracked)

How L.E.K. can help

L.E.K. Consulting have worked with leading financial advisers and wealth managers in both the UK and Europe to develop bespoke organic growth strategies aligned with their specific goals and objectives. Please get in touch if you are interested in pursuing a tailored strategy designed to boost your organic growth.

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