Financial advisors tend to focus more on increasing their revenue than on the profitability of their practices. But in an increasingly competitive environment, it’s necessary to keep an eye on your bottom line if you are going to be successful, says Aiman Dally, CEO of Copia Financial Solutions in Toronto. “While positive asset and revenue growth are good for any business,” he says, “you also have to focus on the cost of doing business.”

Profitability is calculated by subtracting your fixed and variable costs from revenue. Once the cost of servicing is deducted, says Joanne Ferguson, president of Advisor Pathways Inc. in Toronto, each client must be profitable.

Here are some tips for keeping tabs on the profitability of your practice:

– Track growth of aum

Monitor the growth of your assets under management (AUM) over specified periods. “As your book grows, so should your revenue and profitability,” Dally says. But that might not always be the case, he adds, because growth in AUM is not directly correlated to growth in profitability. The percentage increase in profitability vs the percentage increase in revenue and AUM also is important to measure. From this, he says, you can tell whether your profitability is growing at the same pace as your revenue and AUM.

– Measure client revenue

Maintain and review revenue management reports, which indicate the revenue earned from each client.

Heather Holjevac, senior wealth advisor with TriDelta Financial Partners Inc. in Oakville, Ont., says that some clients might be less profitable than others. If that is the case, you may want to review those accounts in a year or so.

If a client is unprofitable, Ferguson suggests, you might decide to pass the account along to junior staff or refer the client to another advisor.

You also may find that client account size does not necessarily correspond to the level of revenue or profitability, as some clients with larger accounts may have negotiated lower fees.

– Analyze your costs

It is essential to do a cost analysis, advises Ferguson. This includes both fixed costs (such as your rent, telephone and insurance) and variable costs (including operating expenses, marketing, prospecting and client meetings).

In determining your costs, you must factor in the cost of your time, Dally says. Some clients might consume more of your time through client reviews and meetings. A simple way to estimate the value of your time, he says, is to divide the total revenue of your practice by the number of hours spent serving all clients. For example, if your total annual revenue is $500,000 and you spend 5,000 hours serving your clients, then your time is worth $100 per hour. You also can divide your total fixed costs by the total number of clients.

– Cut costs

You may wish to cut costs in certain areas, such as getting cheaper office space.

Or, says Holjevac, you can vary your product mix to include products that take up less of your time to manage.

Another suggestion: reduce service levels for less profitable clients once you have reset their expectations.

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