In this environment of increasing competition among financial advisors, it is imperative that you keep an eye on the profitability of your practice.
You might be comfortable with your current revenue, says Jonathan Sceeles, financial advisor with Edward Jones in Toronto. But higher overhead and operational expenses, such as client acquisition and retention, rent, telephone and marketing costs, have a way of creeping up on you unnoticed over time, eroding your profit.
The problem is that most advisors do not focus on measuring profit. Instead, they tend to look only at revenue growth, says George Hartman, managing partner with Accretive Advisor Inc. in Toronto. In practice, Hartman says, many advisors simply do not keep track of the cost of their services, because they either do not understand how to use business metrics or cannot deal with the details.
While you might use revenue growth as a measurement of business performance, profitability is ultimately the key measure of success, says Aiman Dally, chartered accountant and CEO of Copia Financial Solutions in Toronto. “Although your revenue might be growing,” Dally says, “it does not necessarily mean that your bottom line is also growing.”
One way to keep track of your profitability is to use business metrics, which incorporate a range of measurements that allow you to track various aspects of your business, such as growth in assets under administration (AUA), client revenue and profitability, and staff productivity and costs.
Sceeles recommends tracking the growth of your AUA, as your profitability should increase as your AUA grows. Measure variables such as the number of new accounts, average account size, retention rate, and lost or closed accounts. As well, determine whether your average account size is dropping or increasing while your total AUA is growing.
Dally advises that you should also look at growth by source. Is new AUA coming from existing clients, referrals or prospecting? This information can indicate where you can potentially grow AUA in the most cost-effective manner.
“Every client relationship should be profitable,” Hartman says, “unless you are doing some pro bono work.”
To determine client profitability, he adds, measure the revenue that is derived from each client. Note that a client with more assets does not necessarily mean greater revenue for you, Dally says, as some larger clients may have negotiated lower fees.
Once you have measured the revenue generated by each individual client, you then can calculate client profitability by subtracting the fixed and variable costs associated with each client.
@page_break@One of the biggest costs, but one that typically is not factored in when determining client profitability, Hartman says, is the cost of your time. He suggests you segment your clients into “A” and “B” levels, then determine how much time – both face to face and on the phone – you spend with each type of client. Typically, you will spend more time with “A” clients.
A simplified way of calculating the value of your time is to divide the total revenue of your practice by the number of hours spent serving clients.
For example, if your total annual revenue is $200,000 and you spend 2,000 hours serving your clients, then your time is worth $100 per hour.
Dally says that in addition to overhead costs such as rent and those variable associated with managing and running your practice, you also have to measure costs related to activities such as marketing, prospecting, client acquisition and retention, client meetings, events and preparation of financial plans and statements.
Client profitability, Hartman says, comes down to the quantity of resources applied to serving a client vs how much revenue is generated by that client.
Productivity of your staff also is an important factor that must be measured. Normally, productivity is measured in revenue and clients per staff member. By observing rising or falling productivity, you can determine resources allocation and determine if you need to tweak your processes to improve profitability.
If you discover that profitability is falling, Sceeles says, you can initiate cost-cutting initiatives in certain areas, such as obtaining cheaper office space. If you choose to move, you must find office space within the same area or you risk losing clients.
Or you can cut unprofitable clients from your roster and focus only on those who are an ideal fit.
While acquiring new clients can lead to increased profitability, Sceeles says, you have to assess your capacity to serve these clients. If you can, you may wish to work harder by adding a half-day to your schedule.
As for gaining new clients, Sceeles recommends trying to obtain referrals rather than cold-calling. A referral strategy is more cost-effective and, ultimately, more profitable.
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