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Organic Growth Strategy Can Be the Ultimate Hedge for RIAs

This post originally appeared on wealthmanagement.com

Of all the options, organic growth allows advisors to retain the most autonomy and freedom from relying on luck or the whims of deal partners

The cost, complexity, and cyclical nature of mergers and acquisitions put organic growth back in the spotlight for RIAs. But our industry doesn’t do a great job talking about one big advantage that organic growth holds: it keeps advisors in the driver’s seat.

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If you prove you can win new clients and grow wallet share with your existing book of business, you pave the way for sustainable expansion and reduce the need to rely on inorganic growth. Easier said than done? Absolutely. But the truth is RIAs don’t have any fast answers to growth. M&A requires a skillful handling of integration, capital allocation and regulatory complexities. Referrals, though valuable, are unpredictable and cannot provide the only source of growth. An organic growth strategy demands patience, strategic foresight and a relentless focus on client acquisition and brand development.

M&A activity has surged at registered investment advisory firms over the past decade, while organic growth rates have faltered. At last year’s DeVoe Elevate Conference, DeVoe & Co. CEO David DeVoe cited industry data, saying the overall average RIA growth rate was 23% in 2017—but just 9 percentage points of that figure came from organic growth. The organic growth rate dropped to 7% in 2018, 4% in 2019 and 3% in 2020, and then rose to 4% in 2022.

 While analysts predict a strong year for dealmaking in 2024, M&A takes time. Buyers and sellers need to find the right fit, and acquirers seem to be a lot pickier than they might have been in a low interest rate environment. An acquisitive firm recently told me they may have 100 lunches before they find the right firm to acquire. That’s a lot of shots in the dark. 

Client retention is another hurdle in M&A. Clients may be wary of changes in service quality, personal relationships, or the overall direction of the merged entity. Acquired principals will also want assurances that their new firm has the tools to help them achieve earn-out targets. 

Building Long-Term Resiliency

On the other hand, it’s not as though a solid organic growth strategy is a shortcut. Establishing trust and credibility in a crowded marketplace requires a thoughtful marketing strategy, robust prospect and client education initiatives, and a commitment to delivering exceptional value.

Additionally, organic growth requires capable and experienced marketing and sales operators. The competition for skilled growth operators can be just as fierce as it is for financial planners, and firms should consider investing in recruitment, training, and employee development to help ensure a high level of expertise and service delivery.

So why bother? If both channels of growth are time-intensive, why devote energy to the one that represents a smaller portion of overall RIA growth?

Organic growth emphasizes client acquisition— and clients are the bedrock of your business. Conversely, a seller who has neglected their organic growth strategy is unlikely to find the multiple for which they hoped. Buyers with weak hands may be forced to pursue sellers at odds with their culture and business needs, with obvious consequences for client outcomes.

The resources and technology poured into an organic growth strategy allow an RIA to dictate the terms for its own future. The conversation shifts from, “How do I survive as a business?” to “How do I build on my success?” And a strong organic growth program may attract higher quality, next-generation advisors, too. Younger talent and potential successors want to work in an environment that plans for long-term sustainability. Organic growth creates this environment.

What’s more, the anticipated wealth transfer from baby boomers to their adult beneficiaries creates new urgency for RIAs to optimize their client acquisition strategy. With great amount of money in motion and many prospects in need of guidance, successful firms must carefully consider their growth hedge. Generating high-quality prospects is only one step of the process. Successful firms must sharpen their lead-qualification process to help determine the most conversion-ready prospects.

Above all, organic growth strategies require patience. The results won’t come overnight. But the same could be said of the rest of a RIA’s growth channels. Of all the options, organic growth allows advisors to retain the most autonomy and freedom from relying on luck or the whims of deal partners.