Successful Financial Advisors Self-Assess to Grow Their Practice
At some point in your career as an independent financial advisor, you have probably heard a reference to the “Iceberg Illusion of Success.” The premise behind this analogy is that an iceberg resembles a successful person; there are the things that are visual above the water that “look” like success, and there are the many factors and efforts required beneath the water that are necessary to achieve the visual outcome. The illusion is that what we see above the iceberg is often a façade, while what exists below the iceberg is the day-to-day reality. To move the iceberg closer to our goals and definition of success requires a healthy look below the iceberg, otherwise known as an accurate self-assessment.
For financial advisors, the iceberg illusion can often look something like this:
Self-Assessment is a Key Component of a Successful Practice
When it comes to business management, independent financial advisors are often skilled at helping their clients evaluate investments and businesses, and less skilled at a good dose of self -reflection to evaluate the profitability of their own firm. Truth be told, most successful advisors got into the business to advise clients, only to “accidentally” find themselves as a business owner and manager of their own operations, technology, marketing, and human resources.
A self-assessment at the mid-year point is one of the most successful financial advisor strategies one can implement at their practice, as it is a great time to reflect on what has worked thus far, and where improvements can be made to help accelerate growth. Identifying what has contributed to the success of an advisor’s firm—as well as what may be preventing them from pursuing and servicing more clients, more wallet share, and higher-net worth clients—is critical for determining a firm’s trajectory over the following months, years, and beyond.
Today, the traditional financial practice model is being shaped and shifted by demographic and technological changes. While each financial practice is unique in its structure and focus, there is a common set of metrics that can be used to assess the viability and value of any practice, including:
Assets Under Management (AUM)
Assets Under Management (AUM) is a common and favorite metric of the advisory world because it directly relates to revenue. In fact, it is often used by prospects to measure the perceived success of a firm, so it cannot be ignored. Advisors should, however, consider a focus on net new AUM instead. This figure will provide a better indication of both growth in new business and loss of AUM, and further allow for advisors to accurately measure real growth in assets.
Average Revenue Per Client (ARPC) & Net Profit Margin
The problem with relying solely on AUM to gauge practice success is that it only measures top line revenue. To get a deeper understanding of profitability, Average Revenue per Client (ARPC) should be measured. This data point can help an advisor focus on improving their profit margins by having a better understanding of escalating costs or unprofitable clients.
While ARPC focuses on gross profit, an advisor should also have a solid understanding of their Net Profit Margin to understand how their fixed costs, such as rent, affect their overall profitability.
Client Acquisition Costs (CAC) & Lifetime Value of a Client
In order to grow their practice, every financial advisor knows that marketing and business development are a necessary investment. When it comes to marketing expenditures, tracking Client Acquisition Costs (CAC) can help educate an advisor as to how much marketing spend is required to acquire a new client.
In conjunction with CAC, an advisor will start to understand the Lifetime Value of a Client, that is the amount of profit generated for your services over the client’s entire time (lifespan) with you. What is typically borne out of this analysis is a true appreciation for how important client service and experience is in order to keep clients satisfied.
Next Steps For Uncapping Your Growth Potential
Successful financial advisors will note that it is important not to just measure these figures, but to employ the right metrics and consistently track them over time. If you are now thinking, “this sounds like a full-time job itself,” you are not wrong! Traditionally, many advisors use the summer lull to assess the progress of their business at the mid-way point, and the even slower winter holiday months to do the following year’s annual planning. Even these two checkpoints can be a struggle for independent financial advisors, as many find the time to work “on” instead of “in” their business continually falling to the bottom of their “to do” list.
While most advisors acknowledge that finding the time to work on their business development and efficiency is important, they often feel saddled with day-to-day operations that distract from their ability to focus on growth and profitability. The next part in our series of articles will share best practices on how successful financial advisors “find” the time to manage both a business and their client acquisition and servicing.
To learn more about actionable methods to creating growth, scaling your practice, and more tips to grow your practice as a successful financial advisor, look for the next part in our series, Self-Assess to Success! Part II: Do It or Delegate It?
*Source: Peter Drucker
IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable at the time of publication. While we continue to make these reports available, we do not update past reports in light of subsequent events. Nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.