Stop focusing on AUM, track these metrics instead

What you measure grows. Make sure you are focused on the right metrics.

We all fall victim to relying on AUM as a measurement of success.

Yes, it’s an important business metric and it’s how the outside world quantifies success. However, AUM is one-dimensional and masks important information about the health of your business.

No matter your size, if you’re serious about sustainable growth then you need to be measuring trending revenue growth and operating profitability as part of your business’s key performance indicators (KPIs).

Why are revenue growth and operating profitability so important to your RIA or advisory business?

Organic business growth comes from three key drivers:

1. New clients (new assets and revenue)

2. Existing clients (new assets, revenue, and retention)

3. Business efficiencies and productivity (your ability to scale via operations, technology, and people)

Measuring organic growth from new and existing clients

Quantifying the impact of new and existing client growth requires you to measure organic revenue growth, revenue net market growth. Including market growth as a source of revenue is misleading and inflates your metrics. The reality is you can’t control the markets, there’s no way you can retain those assets if the markets go down.

Revenue growth is simply the percentage change of income over time. Tracking client-level revenue can also be a useful KPI to quantify client-level profitability.

Questions to explore when analyzing revenue growth:

• What’s the breakdown between new versus existing clients?

• Are there trends in what type of client is driving revenue and growth? Evaluate by age group, profession, etc.

• What’s the source(s) of new clients (client or professionals referrals, paid marketing efforts, earned media, etc.)? Are these sources diversified? If not, how can you diversify?

• If you’ve done paid marketing, how has it impacted revenue?

• What % of your clients’ wallet do you have? What can you do to increase their assets?

• What’s your retention rate?

• Are there specific advisors or teams that are driving growth? How are they doing it?

Measuring business efficiencies and productivity

Measuring business efficiency and productivity can seem complicated but it doesn’t have to be. Operating profitability provides is high-level metric, which when tracked overtime gives you useful information on the impact of business investments and decisions. Using your income statement you can calculate your operating profitability using the formulas below.

Revenue – Direct Expenses – Overhead expenses = Operating Profit

Operating profit / Revenue = Operating Profitability

What’s a good level of profitability?

According to FA Insight’s white paper, The Six Dimensions of Standout Performance, large stand-out advisory firms’ operating profitability is almost 50% as compared to non-standout large firms whose profitability is closer to 20%. Large firms have the benefit of economies of scale.

For smaller firms, 20% profitability is good. They can manage and increase their profitability by protecting and diversifying their revenue (establish and adhere to fee minimums and policies, and diversify revenue sources) and manage direct, and overhead expenses (strategically spend and measure ROI on expenses that support growth).

Mark Tibergien recommends a 40/40/20 model – 40% direct expense, 40% overhead expenses, which produces 20% operating profit from revenue.

The higher the operating profit the better, 50% profitability is exceptional, 20% is good, below 20% is a signal that there’s an opportunity to improve.

Profitability is especially important if you’re looking to sell or buy your practice, want to exit and be bought out, or are looking to scale.

Questions to ask about your profitability

• What is driving my profitability? What are the largest revenue sources? What are the largest expenses?

• Can I expand or reduce without impacting the business or morale in a negative way?

• How are other firms tracking, managing, and growing their profitability?

• Are there ways to increase efficiencies using technology, process, and people? What can I do with what I have?

Incorporating metrics into your business

What you measure grows. Identifying, watching, and tying your goals to a handful of KPIs is one of the best ways to grow strategically.

1. Start with your goals, what are the outcomes you are looking to drive?

2. Identify the data you need to measure those outcomes

3. Build a dashboard that summarizes the outcomes (visualizing data is helpful to see trends)

4. Establish and get buy-in on your business management review process

5. Identify owner(s) of the process, data, and approach

When you embark on becoming more data-driven keep in mind that simple is better. There are endless metrics you could measure. I’ve seen firms jump on the data wagon and end up overwhelmed.

Below are recommendations based on my experience managing a sales strategy and analytics team.

• Start small, focus a handful of meaningful metrics that support your goals

• Use existing databases such as your CRM or accounting system to drive your dashboard. You can keep it simple and use Excel. If you’re a large organization with many stakeholders you may consider a BI tool such as Tableau

• The more you can automate the better

• Identify an owner of the data and dashboard to ensure accuracy

• Define your data-driven approach and process

• Be patient, it may take time to gain buy-in and trust in the data and outputs

Data will sometimes tell a story you don’t want to hear. Commitment to your goals and process helps you and your team focus on the strengths and opportunities that your KPIs reveal.

Consider naming your dashboard (monthly or quarterly business review – MBR or QBR, or something more creative or in brand), schedule a repeating quarterly or monthly review in your calendar, send the report in advance of the meeting, ask people to come prepared with observations and ideas, send a summary of the meeting with a few key action items with owners.

Again, what you measure grows.

AUM is one, very simple and often misleading, metric. The most successful teams and firms run their business like a business versus letting the business run itself. Revenue and profitability are two metrics that you need to start measuring if you’re looking to grow or transition from your business with intention.

Data, when aligned with goals and used with good intention, is a powerful way to uncover truths and get the feedback you need to make the progress you desire.