Can you take a guess about this observation?

I will wait for a few minutes. Just so you know, I did actually wait for a few minutes. I know you are getting impatient with this silence. At least, I was.

Ask anyone in the industry, “How is business?” and you are likely to hear “Things are great”. If not this, you will certainly hear “Things are fine.” Very few will admit to the problems they are really facing. In fact, we don’t even admit it to ourselves. Even if we do, fewer will ever do anything about it. Well, this is not really the observation because most of us already know this.

There is so much content on how one practitioner built his practice from Zero to XXXX Crore of Assets or how the other single handily built AAA Crore of Assets. The numbers here are not important (I will tell you why shortly). Hence, I have represented them with Capital Letters. 2 problems happen when numbers are used. First, people try to guess who this person or firm is. If they can’t guess it or if the asset size is radically different from their own, the next best thing is to think that this does not apply to them. Thus, I have not used any numbers here because the observation I am about to make applies to everyone. Yes, everyone.

With this out of the way, let’s dive directly into the observation.

“Most distributors and advisors don’t know what their real annual growth rate is.” Wait, it’s still incomplete. The other part of this is that it is not as great as they think it is. While we are not going to publish any data on this soon, there is some detailed work that we have done on this front for different levels of Assets Under Management.

I repeat most distributors and advisors don’t know what their real annual growth rate is, and truth be told it’s not as great as it can be (or as they think it is).

Don’t believe me yet; well then answer this question.

What is your real annual growth rate for the last 1, 3 and 5 years?

You might be inclined to jump to a conclusion and tell me “Amar, I know this at the back of my hand. My firm was at Rs.200 Crore AUM (Assets Under Management) in 2020. We are now at Rs.300 Crore. I have grown 50% in 2 years or 22.5% per year for the last 2 years.”

To which I will ask you, “Are you sure this is your real annual growth rate?”

While you might be tempted to say yes, there is a factor that you might be missing.

Mark to Market.

Did this ring a bell? What was the stock market and the bond market’s contribution to this?

This brings me to a key point that you need to consider. What is the Asset Allocation of your AUM?

Two firms with the same Rs.200 Crore of Assets (but one with 100% allocation to stocks and another one with a 50% allocation to stocks) going to Rs.300 Crore in 2 years will have different real annual growth rates. The firm with all assets in equities is likely to reach Rs. 300 Crore if the market appreciation is 50% in 2 years, but in this case, the real annual growth rate is negative.

Now do the mathematics for your practice/firm.

What is your growth rate for the last 1 year?

Write it down. This is fairly simple. Let’s call this (g).

Now write down, what is the split of your AUM across asset classes?

What were the stock market returns of the last 1 year?

What were the bond market returns then? What about the other asset classes you have?

Do a weighted average of these numbers (I know you know these calculations so I am not simplifying it but if you need help, write to us) and you will get the market’s contribution to your growth. Let’s call this (m).

Your real annual growth rate for the last 1 year (r) = (g) – (m).

You can do this exercise with your AUM or with your revenue. Ideally you should do it with both.

Now repeat this exercise for 3 and 5 years.

Rarely have I come across anyone who has a hold on these numbers but nailing these numbers is a source of real insights and action points for you.

The market tide has been lifting all boats (especially in the last 2 years). This was creating an illusion that everyone was growing or that some real growth was indeed happening. However, many have not grown at all (or as much as they could have) in the last several years or that their real annual growth rate is not as high as they thought.

Having said this, let’s return back to your numbers.

Did your AUM actually grow more than the mark to market impact? If so, how much did it grow by? How many new clients did you add? How much New Client AUM did you add? How much of New AUM from existing clients did you add? There are some other variables too, but this is a great starting point to figure out your real annual growth rate.

The reason this is one observation you should not ignore is because the valuation (or value) of your firm depends on this number. The higher this number, the better the value. I must add here that there are many other variables (many of which I have covered in earlier posts) as well as some nuances such as High Growth and Low Profitability, Low Growth and High Profitability and so on that play a role in valuation. But I would leave these nuances for some other day.

Have you calculated your real annual growth rate yet? If not, today might be a great day to calculate this number.