At the most recent Tech Leaders Conference in Dallas, hosted by Peter Montoya, a discussion was held about how broker-dealers can best support their advisors. One aspect of this discussion focused on measuring the success of financial advisors and/or their practices. Among the discussion points, an interesting observation involved the apparent disconnect between success as measured by a broker-dealer versus a practical approach for the financial advisor to take in measuring and controlling his or her own success.
Broker-dealers typically look at gross dealer concession (GDC) figures, assets under management (AUM) and/or new client acquisition. GDC is the actual commissions or other compensation paid to the advisor through the broker-dealer. AUM is sometimes used as a yardstick to measure the growth of an advisor’s practice. And new client acquisition may be measured in terms of net gains in client count. There is also a measurement referred to as a new money ratio. This is typically the ratio between AUM in versus AUM that has left the advisor’s practice.
But the question remains about whether these types of measurements are for the benefit of the advisor or for the broker-dealer. After all, should a financial advisor’s practice be considered less successful if, for instance, he or she dropped in client count and AUM but increased in net profitability by virtue of higher-profit services, fee-based services or a unique investment product mix that yielded higher revenue numbers? With an advisor’s focus on retaining and growing higher-net-worth clients but purposefully looking to decrease the client count, the net result could be lower operational costs and higher net profit numbers for that practice.
Given that there is considerable pressure on broker-dealers to serve the needs of their advisors in a more comprehensive way, some B-Ds have taken a different approach. At the Tech Leaders Conference, one such B-D, Securities America, mentioned a new initiative to provide comprehensive practice management services to its advisors that go beyond the usual and customary. Others in attendance at that discussion concurred that this is happening across the profession either internally or through the use of outside consultants. One reason for this is increased competition for those same advisors. B-Ds may have to do more in order to retain their advisors (reps) in light of that competition.
However, the value of this is that advisors may better understand and relate to their own practice numbers when they have a more personalized approach that focuses on the unique aspects of their practice.
One suggestion is that financial advisors reviewing profit and loss statements should focus on the net profitability, not just the gross income figure of the P&L. By placing the net profit number at the top of the page (reverse P&L), instead of the bottom, the advisory practice is forced to focus on the most important part of that statement. It also can have the effect of revealing the real cost of doing business.
But a reverse P&L statement is only the beginning. Just looking at numbers does not address the specifics of cost controls that ultimately could improve those numbers. Cost controls applied to a financial advisor’s practice can embrace a number of different disciplines, from quality control studies to “Six Sigma” practices. Six Sigma is a set of practices designed to systematically improve processes by eliminating (or at least minimizing the negative impact of) non-conforming product or service offerings. Applied to financial service firms, this might utilize a set of basic methodology steps identified as DMAIC:
1. Define the process improvement goals that are consistent with client needs and firm strategy.
2. Measure the current process and collect relevant data for future comparison.
3. Analyze to verify the relationship or causality of factors. Determine what the relationship is and attempt to ensure that all factors have been considered.