Do You Really Know Your Numbers?

Know Your Numbers - Financial Advisors TipsOk, you’re a great financial advisor, but are you a great businessperson? Really great people in business always know their numbers, but not just any numbers, the really important numbers!

Many people think that being a great businessperson is to be someone that is entrepreneurial, who can market and grow their clientele. While these are important aspects of running a great business, the great businessperson always focuses on the really important numbers of their business.

So, what are the REALLY IMPORTANT numbers that a financial advisor in business must know?

The stock market daily movements? Definitely not!
Your monthly expenses? No!
Your assets under management? Not Really!
Your total income? You’re getting closer!

The REALLY IMPORTANT numbers that you MUST always know are the following:

  1. Recurring Revenue per Client (RRPC)
  2. Recurring Revenue on Assets (RROA)
  3. Net Profit Margin (NPM)

To borrow a phrase from Don Connelly, keeping track of these numbers is simple, but it isn’t easy.

Before you take out a calculator and divide your gross income by the total number of clients, or assets, to come up with the numbers, let’s think about it for a minute.

Are all of your clients important to your business?

Of course they are. However, some clients have financial issues or don’t have the assets to justify the level of work you and your staff can provide. Therefore, you need to identify, and separate, the clients who really contribute to the success of your business, from the clients for whom you are performing needed work on a “pro-bono” basis.

We have all heard of the Pareto Principle, or the 80/20 rule. Generally speaking, 80% of your revenue will come from 20% of your clients. Some financial advisors interpret this by thinking that they should only focus on the top 20% percent of their clients. I disagree with this approach.

While I agree with the general principle at hand, I think that the great financial advisor creates systems, processes, tools and time management techniques to assure that they will focus their efforts on the right clients.

Most, if not all, financial advisors have heard of client segmentation

and have coded their clients as “A”, “B”, “C” or “Gold”, “Silver”, “Bronze” or some other naming convention. The best clients get the best code, next best get the second code and all the rest get the bottom code. Then you determine the specific services you, and your staff, will provide each level of clients with your best clients getting a broad array of pro-active value add services and the lowest level getting minimal, reactive services.

I agree with the principle of client segmentation, and I have used it for over 20 years in my practice. Through my coaching of hundreds of financial advisors, I have seen dozens of variations on the theme. A common problem that I have noticed over the years, however, is that most financial advisors “wing it” when coding a client to a specific group. They haven’t really approached the process in a fact based methodology.

I believe that client segmentation should begin with the end in mind.

First, you need to determine how many clients you can adequately manage effectively, and give the superior service that you have promised them. Do the math. Be realistic about your time and abilities. Determine exactly how much time you need to devote to each client over the course of year. Don’t say you can handle 200 clients if 100 is the actual realistic number.

Second, you need to determine your total annual recurring revenue goal. This is the important number in building a sustainable business. Non-recurring, commissionable income should be considered bonus income at best.

Third, you need to determine your minimum threshold to be an “A” client. This needs to be a firm figure. I suggest you divide your total recurring revenue goal by your maximum number of “A” and “B” clients and make that figure your minimum standard.

Fourth, other valuable clients should be given a “B”. These are your historically good clients, or your potential future “A” clients.

Now you are ready to begin to know your numbers.

To determine your numbers, you only count the recurring revenue and assets on your “A” and “B” clients. All other clients and assets should be ignored.

What is your Recurring Revenue per Client, RRPC? Whatever it is now really doesn’t matter. What does matter is that it is growing. You should track it on a quarterly basis, and put it on a chart. Track it in absolute dollars, so that you, and your staff, can see the value of your clients in terms that everyone understands, real dollars. You should additionally track it as a percentage of your overall recurring revenue goal.

In regard to your Recurring Revenue on Assets, RROA, you should also track this as a percentage, and chart it, on a quarterly basis.

Lastly, and most importantly, what is your Net Profit Margin, NPM? To arrive at this number, I modify my financial statements from what my CPA says is correct. Why would I do this? Well, because I don’t just care that I have a profitable business, I care that I have a profitable and valuable business.

The bottom line is that if you go to sell your business, income from commissions, non-recurring revenue, has very little value. Therefore, you should modify your P&L statement by only including recurring revenue. The second modification that you should make is to adjust what you pay yourself as income. You should put in a salary equal to what you would need to pay someone to do your job.

Imagine that you are an absentee owner. Now you will have a true picture of the real profitability of your business. A well run business will have a NPM of at least 10% and the goal is to get to 20%.

The result of tracking and achieving these financial goals is that you will have a manageable business with happy clients and time to enjoy your life.

Additionally, you will be creating a business that will be valuable to a potential buyer.

There are huge payoffs by knowing your numbers and becoming a great businessperson!

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