Most independent RIAs don’t know their true marketing budget. In my five years as Marketing Coach at XYPN, I can remember one firm that confidently told me their exact marketing budget for the year. More commonly, a firm owner replies to my budget question with either an extended pause or “I think I can spend $1000 a month?" or, "Like, a few thousand on a website?”
Not knowing your budget for growth is a huge missed opportunity to feel empowered and positive about growing the firm. There’s nothing more frustrating than feeling like you want to book more clients but have few resources to get leads. Without defining the firm’s resources, it’s easy (and common) to mostly see your constraints instead of opportunities, and feel a bit defeated. This truth has parallels to your work with clients.
Budget for your goals like you’d budget for a client’s goals
We can all agree it’s powerful to define your goals, understand what resources you have, and then plan how those resources can be used over time to achieve your goals. As a financial planner, you help clients do just this by analyzing their income and their spending. You help them think about how their resources could better support their goals, and then encourage them to commit to a plan.
Today, I encourage you to look at the firm’s resources in a similar way, and ask some pertinent questions: Is your goal to grow? How much did you spend toward that goal over the past six months? Are you aware of your total budget available? How could we change your spending behavior to better support your goal?
In practice, there are numerous ways to define a marketing budget. Today, I will outline the top three most actionable strategies I’ve seen small businesses use in the real world. There’s no one right method—the best thing you can do is take an hour to look at the options, and then commit to an approach that feels right for you given the stage of your firm. You can always recalculate the budget later when circumstances change.
Phase 1: Time Cost
This method is helpful for new firms with little cash. If you’re in this stage, you have more time than money. You know you can spend ample time on marketing, but not so much cash. As the firm grows and you take on clients, the tables will turn and time will become more scarce than cash, but for today, time is the most readily available resource you have. But do remember that your time is valuable. Even though you’re “just spending your time” on marketing at this stage, you need to acknowledge that it is still a limited resource and calculate its value accordingly.
The math is simple here. What’s your hourly rate? If one hour of your time is valued at $300, then spending 16 hours per week on marketing is equivalent to $249,600 per year. That adds up fast, right? Be cautious about falling into thinking that your marketing is basically free just because you aren’t spending dollars. Your hours always have value, even though today, you can’t fill those hours with paying clients. Instead, you’ll spend your workday on efforts that’ll bring leads. However, know the number:
My “time cost” budget spent on marketing is $_______ per year.
Calculating your time in terms of dollars is a powerful step. Knowing this number will change the way you budget marketing dollars later, and give you incredible confidence to spend cash when the firm has it. I’m proud already! Too many firms miss this step.
For now, commit to those 16 hours (or however many), and stay in action. Here are a few ideas for what to try with your time. As clients begin to sign, you can convert some of your marketing hours into marketing dollars.
You likely want to spend some money at this stage, too, and that’s great. In fact, I recommend it. Keep reading to learn how Phase 2 can add some cash to your budget.
Phase 2: Average Cash Commitment
This approach helps firms with revenue take a quick look at one single number, and arrive at a starting budget that doesn’t feel scary. If you frequent Michael Kitces’s blog, you may already know that most financial advisory firms spend 2% of revenue on marketing. The good news is this number is very approachable, and you can likely make this budget commitment now.
I spend 2% of the firm’s revenue on marketing, $_______ per year.
The bad news is we’re falling short. I’ve worked in small business growth for over a decade, and I am accustomed to spending up to 20% of revenue on marketing. Looking at the difference between these investment percentages, it’s no wonder independent RIAs are often frustrated with their early-stage growth. A sizable marketing budget could help.
All of that being said, you have reached Phase 2 if you’re able to make the average commitment of 2% of revenue going toward the marketing budget. You’re ready for Phase 3 when that feels like a piece of cake.
Phase 3: Business Economics
Finally, Phase 3 is relevant for firms that have historical data for the firm and are looking for a more robust answer. You’ve outgrown Phase 1, aren’t compelled by Phase 2, and are ready to step up your game. Great! If I was the Director of Marketing at your firm, this is how I’d propose we think about the marketing budget:
To start, pull these numbers:
- Annual Revenue per Client
- Attrition Rate
- Close Rate (% good-fit prospects that convert into clients)
- Annual Profit Margin %
- Referral Rate (% clients who send 1+ referral that converts. Example: If 1 in 25 clients send a friend to the firm and they become a client, your referral rate is 4%)
Be sure the close rate you calculated above reflects your ability to convert good-fit prospects into clients, not just any calendar booking. Let’s work with the good-fit conversion number because we want to assume most of the prospects you meet are good fits. When marketing is effective, it communicates who is a good fit for the firm. This is either already true for you or will be true after some budget is spent on creating better marketing. (P.S. Marketing’s responsibility is to bring in good-fit prospects, and then it’s the responsibility of sales to close them.)
Next, we’re going to calculate the value of one good-fit prospect. Please notice the use of both “prospect” versus “client” as we work through this math.
What is a good-fit prospect worth?
$______ /year in fees x ___ years with the firm* = $______ Basic LTV** of a Client
$______ Basic LTV of a Client / (1 + inflation) ^number of years = $______ Adjusted LTV of a Client
$______ Adjusted LTV of a Client x (1 + ____ referral rate) = $_______ Realistic LTV of a Client
($_____ Realistic LTV of a Client x ____% close rate) x ____% profit margin = $______ Value of a good-fit prospect
*Years with the firm on average = 1 / (attrition rate)
**LTV stands for Lifetime Value
Let me plug in some example data to demonstrate how this could play out:
$8,000 /year in fees x 20 years with the firm = $160,000 Basic LTV of a Client
$160,000 / (1 + .02)^20 = $107,675 Adjusted LTV of a Client
$107,675 x (1 + .04 referral rate) = $111,982 Realistic LTV of a Client
($111,982 x 50% close rate) x 30% profit margin = $16,797 Value of a good-fit prospect
You’re welcome to adjust this formula in any way you see fit. Some folks stop at the first line and are happy knowing the basic lifetime value of a client. Others don’t want to account for referral potential, so they skip the third equation. You’re in full control to take this and run with it.
Once you see what a good prospect is “worth” in the business, we can gauge how much we’re willing to pay for marketing. From here, I’d be thrilled if your takeaway was something like:
I want 15 new clients this year, so I aim to book 30 prospect meetings. To get those prospects, I’m willing to set our marketing budget at $10,000/month.
My hope is that this exercise prompts you to find a specific answer to the question, “What’s your marketing budget?” There are many logical ways to arrive at a number, and the only “rule” is that the budget feels right for you and the stage of the firm. You’ll likely feel empowered and motivated once you set a specific number. Excited and ready to start spending? I wrote an article about that, too, regardless if you have $10,000/month or $400/month. Have fun sharing the value of your firm.
About the Author
Carolyn Dalle-Molle is a professional marketer with several years of experience helping small businesses reach their growth goals. Her approach to marketing is both creative and analytical; helping people achieve a creative flow that’s unique and exciting while using tracking and metrics to learn what actually works for their business. Based in Boston, she's honored to work with XY Planning Network from coast to coast. Outside of work, she enjoys volunteering with elderly, making videos, and traveling with her friends and family.
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