Peloton Partners

How often have you found yourself at a seminar or a conference and in conversation with a peer, you inevitably start talking “shop”.  While talking “shop” the conversation starts to get a bit pointy about each other’s business and more directly, some high level stats start creeping into the conversation.

You think to yourself, “wow, my revenue is better than this guy and he has been in business much longer than me” or “I don’t have as many advisers working with me but make more money than her”, or “I have fewer clients paying me a lot more on average than them – I must have a better business”.  As an aside here, it is rare that genuine ‘normalised’ profitability is referenced in these discussions.

Immediately you feel pretty good about yourself and the business and perhaps rightly so.  Fuelled with optimism, you then decide to confirm your gut feel and fill in an online business-benchmarking tool that compares you to the average of the market in your industry.  When you punch those brilliant numbers in, the result confirms how extraordinarily successful you are – job done no more to do.

This story is exaggerated of course but it does happen and there are some obvious pitfalls when you don’t understand how genuine benchmarking can assist you by uncovering the real truth about your business, which will inevitably lead to change.

How should you benchmark then?

Here are four key things to consider when benchmarking:

    1. Start with the obvious – are they in the same industry?
    1. Consider are they similar to your business across the following:
  • Service offering
  • Client demographic or client focus
  • Geographic footprint (city/regional etc.)
  • Business tenure
  • Staffing profile
  • Licensing or back office structure

3. Look at specific benchmarking data points. The major ones are:

  • Gross revenue
  • Upfront revenue
  • Ongoing or recurring revenue
  • Employee expense
  • Operational expense
  • Direct licensing (or self licensing) expense
  • Number of active client groups serviced
  • Number of passive client groups
  • Number of client accounts
  • Clients per adviser / per professional support / per admin support
  • Net profit per client / per adviser / per professional support / per admin support
  • Business Debt
  • Directors / senior advisor salaries
  • Normalised EBIT
  • Net profit after tax

4. Finally, compare yourself to the best in the industry not the average.

Sounds exhausting but when this is all done you can dig deep into the relationship between certain benchmark data points to reveal the key areas you may need to work on in the business.  By narrowing the focus of where to improve your business, means the whole business will move forward.

The key issue is that single or even multiple data points may not tell you what you need to know, only what you want to hear.

A simple and obvious example of this is looking at revenue per client without profit per client.  We have seen many examples of what appears a high average of revenue per client only to see below average profitability for the same client segment.  Just because they pay you more does not mean they are more valuable to you.

Valuation of wealth management businesses in the future will not reflect yesterday or todays reality.  Business owners will need to understand their business far better than they do today to ensure the best result for tomorrow – benchmarking is one way to assist with this understanding.

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