Key Metrics to Measure a Financial Advisory Practice

There is a growing body of evidence suggesting that measuring progress increases the changes of successful outcomes. When it comes to managing a financial advisory practice, there are many different ways to measure success that can help ensure everyone is on the right track. In this article, we’ll take a look at some of the best metrics for measuring a financial advisory practice and some tips for interpreting them.

Assets under management (AUM) has been a long-time favorite metric for the financial industry since it’s directly tied to a firm’s overall revenue. Often times, business owners will look at trends in AUM over time to get an idea of whether or not a firm is growing. These metrics can also be used to set goals for the upcoming month or year, while the revenue estimates derived from AUM can help when creating annual budgets. (For more, see: Key Steps to Building a Great Financial Planning Practice.)

The problem with traditional AUM metrics is that growth will usually become a diminishing figure as the practice grows. In order to avoid this problem, financial advisors may instead want to look at net new AUM - or, new assets under management - for the period less lost accounts. Business owners can use this metric to create a consistent growth target for each period rather than having to adjust it over time. It also provides a more real-time look at asset growth.

Assets under management can’t be relied upon as a single metric for measuring the success of a financial advisory practice because it only measures top-line revenue. For example, a practice could be increasing AUM over time, but rapidly escalating costs could reduce profitability. Some practices may even discover a number of unprofitable clients that may be worth letting go rather than continuing to service at a loss – a surprisingly common occurrence. (For more, see: Advisors: When Should You Fire a Client?)

Average revenue per client (ARPC) is a great metric for measuring and improving profit margins over time. In some cases, a low ARPC figure means that financial advisors may be targeting too small of clientele. These practices could be improved by increasing ARPC through additional product and service offerings or by targeting higher net worth clients that could improve profit margins by reducing marketing and retention costs. (For more, see: Tips for Wooing Wealthy Clients.)

Average revenue per client provides a great idea of gross profit margins before fixed costs, but the problem is that a financial advisory practice can still be unprofitable on a net level. For example, a business with high fixed costs – such as being located in an expensive office building – can make profitability difficult on a net basis, even though the firm may be highly profitable when looking at gross margins and ARPC metrics.

Net profit margins can be calculated by dividing net income by total sales and multiplying the result by 100 – no doubt a familiar equation for financial advisors. In general, financial advisory practices should try to optimize for higher net profit margins, but it’s important to recognize that some capital expenditures may be necessary for long-term growth. Technological solutions are a great example since they provide a competitive advantage at a high initial cost. (For more, see: How Fidelity Helps Advisors Drop Unprofitable Clients.)

Financial advisors can achieve greater success by measuring their operational and financial progress using a number of key metrics. While advisors may be used to analyzing public companies, there are some unconventional metrics that they may want to use to measure the success of their advisory firm that may differ from other companies. Advisors should be sure that they are employing the right metrics and consistently tracking them over time.

In addition to these metrics, financial advisors may also want to consider looking at non-financial metrics like customer touches in order to optimize their reputation and other intangible assets over time. These improvements will eventually lead to more tangible benefits like reduced client churn, lower marketing costs, and improved profitability. (For more see: Trends Challenging Financial Advisors.)