The number you need to grow…

Revenue Per Client Equation

What is the most important metric for your business? Go ahead and answer… I’ll wait.

I’ve asked this question of thousands of advisors over the years and have received a wide variety of opinions. While the responses vary, the most common is assets under management (AUM). Other metrics such as gross revenues, net revenues, fee-based revenue, turn, number of clients, assets per client, and total profit emerge, but with far less frequency, which reinforces that advisors and the industry in general have a thing for AUM.

Most advisors use AUM as their primary growth metric and according to Russell’s 2011 1st quarter Financial Professional Outlook it is the most popular metric upon which advisors segment their book. If everyone is doing it, it must be right… unfortunately, not in this case.

What is the problem with focusing on AUM?

Simply stated, AUM can be a false success metric. More AUM may or may not be beneficial for your business. Before you dismiss this argument, consider the following:

  1. You can’t pay your staff, mortgage, car payments or kids college tuition in AUM (that takes revenue).
  2. You can bring on unprofitable AUM (dead assets, discounting fees, small accounts).
  3. If the focus is AUM, then all AUM is assumed to be good AUM. We know that this simply is not true.

I recognize that if an advisor is 100% fee-based on AUM and they have perfect pricing discipline, then focusing on AUM can be productive, but based on our work with advisors for the last 30 years, an advisor of this type is the exception, not the rule.

So what is the most important metric?

The answer is revenue per client. But why?

  1. It is simple to track. Because it is so simple, there is no excuse not to track it.
  2. It is meaningful enough to impact your daily decision making. Asking the question, “What will this do to my revenue per client?” helps you stay focused on productive activities and outcomes.
  3. It reveals and helps you address capacity problems. The larger the number of client households, the larger the burden to give them all sound advice and appropriate service.

How do you improve your revenue per client?

    1. Get clear on where you are today. Count every household in your book, everyone that considers you their advisor. If your name is on their statement, count them. Divide your total revenue by the number of client households.
    2. Reduce the denominator, the number of clients you work with. Our work over the years has demonstrated that the typical advisor generates less than 2% of their total revenue from the bottom fifth of their book and approximately 4-5% or revenue from the bottom half of their book. More often than not, these clients are consuming too much capacity while not generating sufficient revenues.
    3. Increase the numerator (total revenue) in an efficient manner. This is done by gathering additional assets from existing clients, migrating clients from transaction-based to fee-based, and improving the service and advice you provide. Also, it is efficient to find new sources of revenue (insurance, etc.) and establish a minimum revenue per client target and adhere to it. All of these will help grow revenues in an efficient manner.

When you implement these three ideas, you grow your revenue per client and your business grows in a profitable and efficient manner. Consider focusing on revenue per client, not on AUM and see first-hand how it can positively impact your business.

RFS 11959-b

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