What Is The Compound Growth Rate Of Your Business and What’s That Costing You?

Posted on January 13, 2012 by Bob Simpson 3 Comments

The beginning of a year is usually a great time to do some planning.  For those of you who follow me fairly closely, you know that I am not a big fan of totally left-brain planning.  Numbers confuse and information empowers is one of my core beliefs.

On the other hand, I was a math major many years ago in university so I love creating spreadsheets.  I am also a very early adopter of technological solutions so this blog post joins two of my passions.

I have embedded a spreadsheet (pretty cool, huh?) into this blog post.  It is totally interactive so you can plug your own numbers in and build a quantitative component of your business plan by entering 8 numbers.

• Assets Under Management for the past 4 years
• Target growth rate
• Target fee rate
• Target multiple for sale of your business
• Target profit rate

We created this spreadsheet to help you to understand the cost of low AUM compound growth rates.  You can download this file as an Excel spreadsheet when you are done.

We structured this spreadsheet to start January 1, 2009 so that it does not include 2008 – a year that devastated many books.  The S&P 500 hit a low of 735.09 on February 27, 2009 and has climbed to 1286.07 at the time of writing.   That works out to a compound annual growth rate of approximately 20% over the past three years.

The sample data in this spreadsheet shows an advisor who had a $50 million book on January 1, 2009 and has grown his AUM to $62 million by the beginning of this year.  That works out to a compound growth rate of 7.43% over 3 years and annual growth of 6.9% over the past 12 months.  If this advisor is able to grow his book at his 3 year compound growth rate over the next 10 years:

• AUM will increase to approximately $127 million
• Generate $1.27 million in revenue
• Produce profits of  $635,000

If however, this advisor was able to grow his or her business at a 20% compound growth rate over the same period:

• AUM will increase to approximately $384 million
• Generate $3.84 million in revenue
• Produce profits of  $1,920,000.

Studies like the Moss Adams Financial Performance Study of Advisory Firms showed that advisor practices grew at a rate in excess of 20% over much of the past 10 years (other than in 2008, of course).  So 20% is a realistic target for growth.

Many advisors, however, experience little growth once they hit $50 to $100 million in AUM.  AUM, revenue and profits plateau.  This is absolutely crazy.  Your practice should be a compound growth machine.  As you grow, you increase the number of family relationships (Client Network) and you should be increasing the size of your Professional Network.  You are probably also establishing new friendships so your personal network is growing too.  The bigger your networks, the faster your business should grow.

Here is what does not make sense.  People prefer to choose professionals through recommendation from a friend or colleague.  Advisors gain 60 – 80% of new clients through client or professional referral.  As your client, personal, and professional networks grow; your business should grow faster.

If your business growth is not accelerating, you are doing something wrong:

• Your client satisfaction rates are not high enough (even if they tell you they are satisfied)
• You have capacity issues
• You have too many small clients and are not properly managing your larger clients
• Your processes for managing client relationships are not performing properly
• You are not delivering programs based on your clients’ preferences and priorities

If you grow your business at a 7.43% compound growth rate (as per the example in the spreadsheet) over the next 10 years and then sell your business, you are leaving almost $9 million (pre-tax) on the table, compared to 20% compound growth.

It only takes entering 8 numbers into our spreadsheet to lay out your plan for the next ten years and to understand the numbers behind the importance of achieving and maintaining high compound growth rates for your business.

Here’s a very important question:

If you are not growing your business at a 20% compound growth rate, what changes do you need to make to achieve this goal?

If you have not yet joined our Advisor Collaboration group on LinkedIn, please join our discussion about this topic next week.  You can join by clicking on the following link.  You must be an advisor to join:

Advisor Collaboration on LinkedIn