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Hosted by Financial Advisor Coach, Ray Sclafani, "Building The Billion Dollar Business" is the ultimate podcast for financial advisors seeking to elevate their practice. Each episode features deep dives into actionable advice and exclusive interviews with top professionals in the financial services industry. Tune in to unlock your potential and build a successful, enduring financial advisory practice.
Ray Sclafani (00:00.366)
Welcome to Building the Billion Dollar Business, the podcast where we dive deep into the strategies, insights, and stories behind the world's most successful financial advisors and introduce content and actionable ideas to fuel your growth. Together, we'll unlock the methods, tactics, and mindset shifts that set the top 1 % apart from the rest. I'm Ray Schlaffani, and I'll be your host.
So this is going to sound totally obvious, but let me state it anyway. Acquiring new clients has got to be the lifeblood of every growth focused advisory business. Sure, &A deals tend to garner the lion's share of media's attention, but most of the best run firms place far more emphasis and effort on driving growth organically. Not only revenue from existing clients, expanding wallet share, but key here is finding new clients.
And given the decade long bull market we've all experienced, firm growth via market appreciation has been so steady, the fee on assets under management has grown in such a steady way, many firms in the RIA space have frankly slacked off their new client acquisition efforts. And so in today's episode, I want to hone in on a very important topic. Let's amplify how to calculate your client acquisition costs, the CAC.
If you watch any episode of Shark Tank, you know Mr. Wonderful asks one specific question of every entrepreneur as they enter the tank. And that is, what is your CAC? What are your client acquisition costs? And why is this so important in financial services if you're building and growing a billion dollar wealth advising firm? Well, pretty simply put, the client acquisition costs relative to the lifetime value of the client. Most in financial services have a very high retention rate with existing clients.
And therefore the lifetime value is extremely high relative to the CAC, the cost of acquisition. But when we focus on organic growth, I think it's important that we level set how we're thinking about organic growth here at ClientWise. If you strip out capital market growth from your total growth and don't count it, and you strip out any growth derived from client acquisition through &A, strip that out and only focus on new client acquisition
Ray Sclafani (02:25.962)
and focus on the revenue from existing clients, the expansion of wallet share, new assets, new revenue from existing clients. That's organic as well. For the purposes of today's episode, what I really want to hone in on is this new client acquisition cost. Many firms in our industry are really surprised when they start running the numbers, how little genuine organic growth specifically from new client acquisition they've experienced over the past few years.
This is one of the key reasons why competition for wealthy clients has begun to steadily intensify. There are many good reasons for you and your leadership team to focus on organic growth and specifically new client acquisition. But here are a few things I'd ask you to think about. The first is enhancing your enterprise value. When you think about your own personal balance sheet and the value of the shares that you hold at your firm and what others are willing to pay for those shares, when you organically grow the business,
through new client acquisition and can demonstrate your effectiveness in that area, well, you contribute to your rising enterprise value as a firm, and then you reflect your ability to expand revenue and profits through internal operations. This growth is often seen as a sign of robust and sustainable operations, and that makes your firm more valuable. It makes it more attractive to potential buyers or investors. And after all, at some point as an entrepreneur,
you're going to want to find a buyer for your firm shares and at the right price. So enhancing enterprise value, number one. Number two, when you get new client acquisition really dialed in, companies that demonstrate consistent organic growth are more appealing to next generation owners and investors. They know if they're buying or investing in a business like yours that has this organic growth through new client acquisition institutionalized in some way where the business operation
can actually generate that new business. Well, you're demonstrating and indicating that you've got a stable and scalable business model and that reduces the risks associated with external growth strategies like acquisitions or mergers. It also shows that the company's well positioned for future success and it makes it an attractive investment. High performers and top talent are always attracted to firms that are in growth mode and have an ability to grow organically specifically through new client acquisition.
Ray Sclafani (04:49.004)
Something else magical happens when you zero in on better new client acquisition, better the client coming in through whatever strategies you deploy. And we'll talk about that just a moment. You also are demonstrating the future organic growth opportunity, good quality clients coming in, folks that are rising their incomes, they're growing their wealth. They follow the advice that you provide. They come into money. They come into
complex situations where they need more estate planning tax and the revenue per client actually increases over time. the reality is this new client acquisition is really a good milestone for the next generation owners and investors that say, wow, look at this track record here. They can find new clients and they find good quality new clients. This is a business worth investing in. The third reason is it enables reinvestment for competitiveness.
When you're growing new client acquisition and growing that revenue per client, your organic growth generates the need that you're going to have for capital. So as you want to reinvest back into the business to remain competitive by investing in technology, talent, and even the very best advice, you're going to want to upgrade your services. This continual investment in these areas puts your firm in a better equipped place.
to serve clients now and into the future. And that puts you in a leading competitive position in the marketplace. So as you reflect on your firm's organic growth strategies, specifically new client acquisition, it's never been more critical than now to ensure that your firm's marketing and new client acquisition efforts are cost effective and able to generate a sustainable growth trajectory in the business. Most advisors spend very little as a percentage of gross revenues on marketing.
Most spend somewhere between one and three, maybe 4 % and don't know what their return on investment is. The best in the business spend five, seven, 10, 12%, but they know exactly what their ROI is and they know exactly their client acquisition cost. So one effective approach to achieving this is to actively manage your CAC, the client acquisition cost. But unlike your firm's CAGR, the compounded annual growth rate, which has a universally accepted formula, everybody knows how to calculate the CAGR.
Ray Sclafani (07:08.59)
There are some target benchmarks around CAGR. I take a little exception to some of those for being overly simplistic. That's a topic for a different time, but everybody knows what a CAGR is. There are no hard and fast rules around what your client acquisition cost should be. So this is a formula that you need to build for your own firm. I'm to give you a roadmap for how you want to think about it, but then you've got to consider how you fold in your own expenses related to your CAC, the CAC, the client acquisition cost.
Here's what it is. Here's the formula. It's the total cost of acquiring new clients for a specific period, all the marketing and sales expenses that you're investing for the clients that you're bringing in. So you divide the total number of clients into your total cost for that particular period. And you come up with a CAC. The formula for calculating your firm's CAC is really simple and straightforward. Again, it's the total client acquisition costs divided by
the total number of new clients acquired during a specific period of time. So what's especially challenging is that CAQs can vary widely based upon the size of your firm, the types and wealth levels of the clients you seek to attract, maybe the geographic location of your business and a host of a lot of other factors. Like, do you include your CRM system in that CAQ? Do you include your website development in the CAQ?
All of that's really important. What's key is that you're consistent in your own methodology. It varies widely by firm. So an appropriate CAC for one advisory firm may be vastly different to the CAC for another advisory firm. And there's no benchmarking data that we have found yet at ClientWise. So we spend time helping advisors sort of figure this out for their own firms. And that's what this episode is about. Where do you begin? Okay. Start by adding up your total acquisition costs. By way of example,
Let's say you're running a mid to large sized $700 million asset under management advisory firm, and you've got roughly 400 clients. now given those parameters, you might reasonably expect to incur the following expenditures. By the way, I'm taking an example right out of the page book of one of the advisory firms that we coach. You might have marketing and advertising expenses at about $100,000. Sales and business development, maybe $150,000.
Ray Sclafani (09:30.83)
You've got a referral program and you're spending $25,000 there. Events, seminar marketing, $50,000. Technical and software investments, $30,000. Creating content for the website, $20,000. Overhead, $25,000. Branding, PR, $10,000. Okay, that total adds up to $410,000 in total client acquisition costs.
Okay, assuming your firm was able to successfully acquire 100 new clients, I'm using something for easy math here. The firm I'm describing didn't actually bring in 100 clients during this particular period. But nonetheless, I'm doing this. So if you're listening to this episode, go, okay, I got it. 410,000 total acquisition costs. By the way, those are real for this firm. 100 new clients not real for the firm. The number was closer to around 73.
but another conversation for a different day. So what's the CAC here? 4,140 bucks in this example. That's the math equation. Total client acquisition costs, real costs at 410,000. Let's use an arbitrary hundred new clients. The divisibility there comes out to $4,140 per client. Okay. What are the components? Let's break this down a little bit further. By the way, that client that cost $4,140
that you just brought in, what's the lifetime value of that client? You're talking about a client at a million dollars in assets under management, $10,000 a year in fees, lifetime value of the client, maybe 20 years, and the cost of advice and service. Is the $4,140 investment a good investment? Absolutely it is.
This is one of the secret sauces of our industry is the cost of acquisition relatively low. might disagree just ever so gently with Michael Kitsis, even on a relative basis, it looks like a big number, $4,140, but that by itself is unacceptable. You've got to look at the lifetime value of this relationship and the expanding nature of the relationship. If you do a good job for this client,
Ray Sclafani (11:47.498)
and their assets are on the rise, the revenue per client increases. Well, over time, that lifetime value is only expanding. And by the way, you've got the capital markets and a little bit of a wind at your back if you're betting over the next 10, 15 and 20 years, will the markets be higher or lower? Sure, we have fee compression, you'll take that into consideration, maybe the rising costs of labor and inflation. But at the end of the day, the lifetime value of the client far outweighs the cost
of acquisition. what are those buckets to consider? under marketing and advertising, you you've got digital advertising. Some of the clients we coach, they use LinkedIn, Facebook, they're targeting very specific executives or people on digital platforms. And so they're spending some money there. You've got traditional advertising, radio, TV, billboards, print media. You've got some other content marketing blogs and videos, which are really popular here.
Some of the advisors we coach use YouTube and produce really short videos that get great SEO development and traction. So that's an example of marketing and advertising expenses. Under sales and business development, you want to capture sales staff expenses, salaries, commissions, bonuses, and maybe not all of it. You look at the time spent, you've got an advisor on your team that's a young next gen on a
passage to partnership and demonstrating their ability to hunt in the jungle and bring new clients into the firm. They might spend 30 % of their time on that activity. We'll take 30 % of their comp and attribute it to cost of acquisition. You've got travel and entertainment expenses for client meetings and events. You've got any acquisition tools designed to streamline and assist the sales process, not your whole CRM system, but maybe you allocate a portion of that to your CAC. This is where customization of your CAC
expenses relative to your firm, it's good to be consistent over time. Number four, event and seminar costs. Okay, we know what those are. Technical and software costs, financial planning software, or maybe you're using something like HubSpot.com for lead generation and lead workflow or constant contact for your email distribution. Well, any of those technical and software costs, well, they come into play too. Number six, content creation. You might develop some white papers or some ebooks
Ray Sclafani (14:11.212)
or other downloadable content to help generate leads, email marketing campaigns, you hire a writer to develop some of those campaigns. That's content creation for distribution costs that you would allocate as part of your CAC. You also want to zoom in on some overhead, not all of your overhead, but a percentage of your rent utilities allocated to marketing and sales and your administrative staffing that supports marketing and sales. You've got some branding number eight,
and PR costs. You hire somebody to do PR marketing for your firm or you hire a marketing company to help you with brand presence. All of that counts as well. So here are just a few tips when you start optimizing your CAC. I want to hone in on those and then we'll wrap up. Obviously, your goal should be to actively invest in client acquisition. If you want to grow your enterprise value, reinvest capital and attract investors in next gen. But always an eye on the most bang for the buck.
The juice has to be worth the squeeze. So know your CAC upfront, but before you just start spending a whole lot of money, dial that in, put a finer point on what that CAC might be. So leverage some data analytics, use data to track the performance of specific marketing channels and campaigns and focus just on the channels that provide the highest ROI. Enhance your digital presence. Use SEO to determine where do you rank in organic search on the web?
Use social media platforms for targeted advertising and client engagement. You want to develop high quality content. In Mark Hurley's white paper, Welcome to the Jungle, one of the things he talks a lot about is the sharp elbows and how you're going to really need to build your specialty in the marketplace to differentiate yourself. All rich people, that's not a target market any longer. You've got to be viewed, your firm has to be viewed as an expert in specific areas. And by developing high quality content,
You're actually going to be able to nurture more leads through your sales funnel. You'll attract more at the top of the funnel in order to build that connection with an audience that sees your firm as an expert. You also want to strengthen your firm's referral programs, offer attractive incentives, and a set certain service model for your best clients and other professionals who are able to introduce the right kind of client to your firm and institutionalize your sales process.
Ray Sclafani (16:34.542)
Train the business development team to be more effective in converting leads and leveraging CRM. You've got to get your capability deck dialed in using the web and all the content marketing in a unique and different way, your campaign marketing. That's a real process. If you're to invest in marketing and new client acquisition, well, you've got to invest really smart. Sustainably growing your business starts with understanding and optimizing your client acquisition costs. Carefully track and analyze your CAC.
and then leverage the insights from other industry experts. I talked about Mark Hurley today. Michael Kitsis has done a lot of work in this area. John Fury at Advisor Growth, all can help you develop targeted strategies to attract and retain clients more efficiently, ultimately driving long-term growth. There are a number of really high quality marketing firms that can help you as well. The key is to strike the right balance of marketing investments.
client experience enhancements and continuously refining acquisition strategies to stay competitive as the industry evolves. Rest assured, the opportunity for new clients over the next decade and the rising competition for high value clients, it will only grow. So make certain your firm is well-positioned to grow organically. I feel like we're having this conversation today and it's going to become more and more important in the future. You got to know your numbers, specifically your CAC.
Now you will likely find how important it is to grow and how much you want to invest when you dial in on knowing your numbers. After all, growing organically and increasing the number of new clients your firm can serve, expand your impact and truly makes a difference in the lives of many. With each episode, we've got some coaching questions. Here are a few to consider. How will your firm improve? How it measures and calculates your CAC?
What strategies will your firm implement to optimize your CAC while attracting high value clients in the coming years? And in what ways can you and your leadership team refine your client acquisition approach to ensure sustainable growth and profitable growth that increases the enterprise value of your firm over the next decade? And lastly, how does your firm today measure your organic growth rate? Well, thanks for tuning in and that's a wrap. Until next time, this is Ray Sglafani. Keep building.
Ray Sclafani (18:55.288)
growing and striving for greatness. Together, we'll redefine what's possible in the world of wealth management. Be sure to check back for our latest episode in order.
Ray Sclafani (19:09.374)
you