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Written by: Matthew Jarvis
A potential client came into my office saying they had over a million dollars in assets, only spent $5,000 monthly, and fit in my niche.
I was thrilled that this prospective client could be an ideal fit for me—until we started digging into their actual numbers.
I found that this prospect really didn’t have a million dollars in assets. They had $600,000, and their monthly spending was over twice their estimate and came in at $12,000.
The prospect’s numbers were utterly different from what the client thought they had, and the discrepancy blew me away.
How could they not know how off they were?
You’d be surprised how easy it is to inflate values absent-mindedly. It’s easy to fall into the trap of thinking that $600,000 in assets isn’t that far from $750,000, and when you round that again, it’s practically $1 million, right?
We all do this to some degree—including advisors—regarding the metrics in our practices.
If you don’t look at your actual numbers, you’re going to fall into this trap, too. We all have an idea of what our metrics are, but if you’re not strict in tracking the values that matter in your practice, they’re liable to run away on you.
So, what metrics should you measure, and how do you find them? Let’s look at the most common metrics recognized in the industry and the one value you should be tracking above all others.
The metrics that matter
No matter which corner of the industry you’re in, we can all agree that you should measure things in your practice. I’ve never met an advisor who’s yet to disagree with that statement.
However, not all metrics we can measure in our practices are equal. Not all the values you could measure in your practice count.
We can all agree that tracking the number of weekly phone calls your practice receives isn’t effective, and I hate to break it to you, but Assets Under Management isn’t the most reliable source for comparing practices either.
AUM
Many advisors use their AUM as a measurement of success. You can easily pull another advisor’s AUM because it’s listed on every advisor’s ADV (unless that advisor is under someone else’s RA).
I like that AUM is reportable. However, Forbes’ reporting shows that AUM isn’t reported the same.
Some count every asset a client has—regardless of whether the advisor manages them.
Other teams of advisors will pool their assets under management and take turns being on the list. Say each advisor in a group has $100 million in assets each, but suddenly, one guy has $600 million, and the other five guys have zero, and next year, they’ll switch.
While AUM is a cute number, and it has to be accurate so SEC doesn’t hunt you down, it doesn’t reflect your effectiveness in your practice.
Time in the office
Many advisors wear their time in the office as a badge of honor. They’ve sacrificed sixty to seventy hours a week in their office chairs to serve their clients and want you to know it.
Everybody likes to talk about the hours spent in front of their computer, but I can guarantee that most of their time was spent playing office.
They were doomed to scrolling social media or finding silly ways to feel busy while getting nothing done.
Much like AUM, hours and days worked per year don’t tell the whole story of your practice.
Number of households
Advisors also track the number of households they serve. The number of clients can run an entire spectrum between advisors who are “at capacity” with only twelve clients and advisors who feel ashamed that they only have 600.
And while it’s critical to track this value, this is another number that doesn’t show how effective you are in your practice.
The one metric that counts
While you need to track your AUM, your days out of the office, and your number of clients, none of these values truly illustrate how effective your practice is.
That said, there is one number that we can use that allows us to quickly level the playing field between firms and compare advisor to advisor by combining all other metrics to find your effectiveness per hour.
Your effectiveness per hour boils down to your gross and net hourly rate (we’re not looking at your billing rate).
What is your gross income for last year? And how much time did you spend working?
Your answers to these two questions will give you your hourly effectiveness.
Hourly effectiveness will vary wildly between practices and will give you a gauge of where you are and where you’re headed.
Suppose your hourly effectiveness is $37—congratulations on getting started in the industry! As a budding new advisor, you should spend all your time prospecting.
Once you reach $300 to $1,000 per hour, you should look at graduating clients who aren’t a good fit for you.
Knowing your effectiveness per hour is superior to all other metrics because it factors in the advisor who spends seventy hours a week working and the advisor who spends thirty hours a week working.
While both advisors have the same revenue, these are not the same practices. One has more effective processes and systems in their practice than the other.
The same goes for AUM, as the effective hourly rate will factor in all the real money an advisor charges for managing.
Once you know your effective hourly rate, you can springboard into a more effective business planning approach to improve how effectively you:
- Plan your time
- Grow your practice
- Manage your revenue
- Deliver value to clients
Use your effective hourly rate to refine your goals for revenue and time spent working for next year.
Once you know these values, you can back into how much you need to work to make a million dollars or take six months off.
Action Items
- Check out our free quiz to see what’s killing your success.
- Your results on this quiz will give you a benchmark to compare your practice based on our experience coaching hundreds of advisors.
Related: Like Coke From a Coffee Mug: Run Your Best Client Meeting