Benchmark Your Business By Paying Attention To The Right Numbers
When advisors exceed their goals, they may feel on top of the world. But are they outperforming their peers?
By measuring various aspects of their business — and comparing the results with other advisors' similar types of practices — wealth managers who run their own firms can gauge the effectiveness of their operation. Benchmarking can also expose areas that need improvement.
The challenge for advisors is determining which metrics matter most. While it's tempting to check obvious numbers such as assets under management, they can also track dozens of potentially revealing indicators related to expenses, sales and client service.
"We've been doing benchmarking for years," said Neil Waxman, a certified financial planner in Shaker Heights, Ohio. "It's important to have good comparative metrics."
Since 2000, Waxman and his business partner have participated in benchmarking studies. Their involvement began when they hired consultants from Moss Adams, a Seattle-based research firm, to help them strengthen their strategic planning process.
One of those consultants, Mark Tibergien, introduced a concept that he called the 40/35/25 rule: direct expenses should be no more than 40% of revenue, overhead expenses should be no higher than 35%, and operating profit should be no less than 25%.
Waxman took it to heart.
"The rule has been very helpful to us over the years," he said. "Overhead expenses, in particular, can get away from you. There are years when you have huge technology expenses."
The Right Ratio
With a team of 12, Waxman monitors staffing ratios such as the number of active clients vs. the number of in-house advisors and other professionals. He says that his firm, Capital Advisors, is currently at 29-to-1, while a 2016 industry study showed that firms in the top quartile of performance had a 66-1 ratio.
Tracking that measure helps him answer two key questions: "Are we prepared to provide excellent service to our clients?" and "Are we streamlining our operations enough to make sure we're as efficient as we can be?"
In addition, Waxman scrutinizes a series of financial and business development benchmarks to assess the ongoing health of his practice. Examples of financial metrics include gross profit margin and operating profit margin. To evaluate business development, he looks at indicators such as his firm's prospect-to-client conversion ratio.
Enthusiasts can get carried away with benchmarking wide-ranging aspects of their business. But Waxman puts the numbers in perspective, checking them on a quarterly basis.
"I don't think about them every day," he said. "And I don't want our team to think about them every day. I never want our staff to think, 'Am I spending too much time on a client?' We're very client-centric" and getting too caught up in the numbers can interfere with service delivery.
Many research firms provide benchmarking data for advisors. InvestmentNews released its latest financial performance study in September 2016. And many large financial services companies offer proprietary benchmarking tools that firms can use to compare their results with their peers'.
Learn From Standouts
TD Ameritrade (AMTD), for example, is unveiling Veo One Analytics to help advisors focus on key performance indicators. The Omaha, Neb.-based company is rolling out the platform, what it calls "an on-demand digital dashboard," later this year.
The new benchmarking tool will enable advisors to track four critical areas: revenue growth, revenue per revenue-generating role, overhead expense margin and operating profit margin.
"We narrowed it down to the four most telling data inputs," said Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional.
At its best, benchmarking involves both internal and external analysis. She says that advisors can examine how they compare with other practitioners "in the outside world" as well as look within and gauge their historical performance based on their internal numbers.
The next step is to learn from the data and take action. This usually centers on the simple question, "Why?"
Oligino cites the example of an advisory firm that analyzes its revenue per revenue-generating role and concludes that its ratio falls below the industry norm. To explain why it's underperforming, it spotlights advisors' daily activities.
"It could be you have advisors who are less business development oriented and more service oriented," Oligino said. By training them to do more business development and devoting, say, 20% of their day to networking and other outreach, they can lift their results.
To maximize the value of benchmarking, make apples-to-apples comparisons. Measuring yourself against an overly broad range of competitors can prove an exercise in futility.
"Many advisors will compare themselves against the overall industry average," Oligino said. "We suggest focusing on your peer group. Compare against your true peers, look at the top quartile of those peers, and learn from those standouts."
Benchmark Your Business By Paying Attention To The Right Numbers, Morey Stettner, 4/21/2017
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