Trending
Sure, you're a great financial advisor, but are you a great businessperson? Great businesspeople intimately know their numbers. Not just any numbers, but the most important ones.
Many advisors make a mistake by thinking great businesspeople are entrepreneurial in growing their assets and client base. While these are essential aspects of running a great practice, the great businessperson always focuses on the significant numbers affecting their practice.
Before you take out a calculator and calculate your gross income or assets, let’s instead begin this journey by thinking about why knowing your gross income or asset sources is essential.
80% of Your Clients Represent the Bottom Half of Your Assets
There are a few ways to segment your business. The Quadranted Segmentation Tool is best used to learn about which quadrants of your business run a profit or run you into the ground. If you have not done this – let me know, and we'll do it together. It doesn't take long and becomes integral to understanding your investor base and practice economics. If you have completed it, you will have discovered, in general, we find that 80% of your clients represent the bottom 50% of the assets in your practice.
Some financial advisors interpret the above result by thinking they should only focus on the top 20% of their clients. I disagree with that approach, which again reinforces the importance of knowing your numbers. Don't get me wrong. While I agree with the general principle of focusing on the highest margin clients, I think that great financial advisors would first create systems, processes, and tools and adopt a platform to help maintain or increase the service experience to lower-tiered clients before focusing on the top 20%. With 80% of your clients positioned well for the future, advisors can put client experience systems in place for the highest-tiered clients.
The benefits of taking the time to complete the segmentation tool
The Quadranted Segmentation Process requires a closer look at each client individually and by household and grades them in a fact-based manner. The grading process involves coding their clients as "A," "B”, "C", "D", or some other naming convention. The best clients get the best code, the next best get the second code, the next best get the third code, and all the rest get the bottom code. The result of this exercise helps you identify the two top tiers and the two bottom tiers by the number of clients and assets.
I strongly believe in client segmentation and have used it for 30 years to help advisors improve. Through my coaching of hundreds of financial advisors, I have experienced more "Aha" moments than any other exercise. This exercise launches further conversations about how to grow with scale, maintain their lifestyle, or optimize the practice value for sale.
What are the Numbers?
Let's look at the numbers you'll want to focus on, what they mean to the growth of your practice, and how they are essential to your success:
· AUM (Assets Under Management) & Asset Growth
· Gross Recurring Revenue
· Earnings before Interest, Taxes, Depreciation & Amortization (EBITDA)
· Net Profit Margin (NPM)
· Practice Value
AUM & Asset Growth
A former branch manager once mentioned looking at AUM and asset growth because they indicate revenue health. A growing trend is good, and a declining trend is bad. If you're in a "maintain a lifestyle" mode, you generally want assets to not decline.
Gross Recurring Revenue
For those advisors who have seen the light to move away from client-name, A-Series commission-based income to fee-based, this is a significant number to track and manage. Fee-based, recurring revenue is crucial in building a sustainable business with stable and growing revenue.
Earnings Before Interest, Taxes, Depreciation, & Amortization (EBITDA)
This number from month-to-month to year-to-year shows how efficiently you run your practice. If EBITDA grows over time, that's good. You're showing that you have the appropriate fixed and variable costs to match the needs of your growing practice.
Net Profit Margin (NPM)
Calculate Net Profit Margin by dividing EBITDA by Gross Revenue. The result is a percentage. A growing NPM is good. Declining NPM would trigger the need to take a closer look at revenue, fixed, and variable costs in your financial model.
Practice Value
Most US-based financial advisors have realized that practice value is very important and that all investments in the business must increase practice value or it doesn’t happen. That said, Canadian advisors generally do not think about practice value until it’s time to sell the business or retire. In my opinion, practice value is the most important number on the scorecard that matters.
As a financial advisor, you should know at every turn what your practice value is. Armed with this information monthly, I promise it will change your outlook on many fronts and encourage you to think more like the great entrepreneurs.
For those who have a few years running their business, this number should be part of your annual playbook goals. For advisors 5-10 years from retirement, practice value should be the top priority. Buyers today look for turnkey, systemized, and growing practices and are willing to pay a premium for these businesses.
Imagine that you are an absentee owner of a practice. These numbers will show your business's actual profitability and performance. Tracking and achieving these financial goals means you will have a manageable business with happy clients and time to enjoy life. You will also create a business that will be valuable to a potential buyer.
Related: The Impact of Losing an Ideal Client: Lessons for Financial Advisors