Refined Metrics for RIAs: Improving Performance Measurement

As in every field, financial advisers have a standard set of metrics they use as a barometer for success.

Think of times you’ve met a fellow adviser. To get a sense of her firm, you likely asked about its assets under management, its growth over the past five years, and perhaps the number of full-time employees.

You used the answers to assess the firm’s value, productivity and chances of future success. You likely use these metrics to measure your own firm, too. But here’s what I’m realizing — we’re tracking the wrong things.

The problem with these metrics is that they are lagging indicators — they give us insight only into what has previously occurred. What I propose is a shift to focus on leading indicators, those elements that will more likely predict the future performance of a firm and can help firm leaders identify potential strategy gaps.

Other fields have adopted this approach. Some school systems have gone from using high school graduation rates as a measure of success to looking at how many first graders can read, or how many eighth graders complete algebra.

When it comes to the economy, instead of looking at GDP or income increases, we look at retail sales, inventory levels and even building permit applications as more accurate indicators of future economic growth. These measurements are much more valuable because they enable us to pivot and make changes while there’s still time to do so.

Returning to financial advice, here are a few ways firms looking to more accurately predict their future health might shift their performance metrics to use leading indicators:

• Measuring client happiness and loyalty through client referral rates, the percentage of clients with whom you have relationships and meetings with trusted third parties, and share of wallet.

• Tracking and projecting growth through client referral rates, the diversity and ratio of sources of growth, and the percentage of growth driven by just a few clients​ rather than just past AUM growth.

• Evaluating staffing effectiveness by looking at ratios such as adviser to nonadviser, client to full-time employee, and client to adviser.

• Testing the effectiveness of your pricing and segmentation strategy by gauging percentages of average discounts across all clients and within each segment, new clients within a disciplined, best-fit client profile and clients on a recurring revenue stream.

• Forecasting your firm’s sustainability through an assessment of the average age of the firm’s clients and whether or not you have engaged families multigenerationally, as well as testing your succession readiness.

This shift isn’t just a hypothesis. Fidelity’s 2018 RIA benchmarking study found that firms with four sources of growth (sources such client referrals, centers of influence or referral programs) had an average annual growth rate of 15.6%, versus 8.5% for firms with one source of growth.

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We also see high-performing firms consistently bring in a higher share of new assets from existing clients, representing an increased client share of wallet. These are just two examples, but indicative of the value of looking forward.

This isn’t to say that more traditional benchmarking metrics don’t have their place. It’s critical for firms to know where they stand among their peers.

But just because you have grown doesn’t mean you’ll keep growing, which is why firms should also track forward-looking metrics to gauge the likelihood of that growth. As we all know in this profession, past performance is not indicative of future results.

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Anand Sekhar is vice president of practice management and consulting at Fidelity Clearing & Custody Solutions.

Related Topics: Fidelity Investments, RIAs