Firms that identify the key drivers of performance can increase their profits by 40 per cent. Kristen Paech reports.

In funds management, past performance is no indication of future success. Running a financial planning business is no different. A lot of the time, financial outputs like revenue and profit, while still important, are “lag” indicators of company performance – the results of a firm’s strategies and actions. They tell you how successful the company has been in the past but fail to provide much insight into how the company is likely to perform this year, next year, or 10 years from now.

“Lead” indicators on the other hand, like client activity and business planning, are the things that a company is doing to ensure success in the medium to long-term. By taking lead indicators into account when “benchmarking”, a business might identify potential bumps on the road before they encounter them. After all, as a practice principal you don’t want the first sign of client dissatisfaction to be seeing a client walking out the door.

“In benchmarking it’s essential that you have both lead indicators and lag indicators,” says Grahame Evans, managing director of Professional Investment Services (PIS).

“The reason you need lead indicators is if you’re looking at things in the rear view mirror you have little chance to correct them if things go wrong.”

Benchmarking – measuring the success or otherwise of a business – is vital in establishing where a firm stands today, and which direction it is headed. David Fox, principal of Advice Centre Consulting (ACC), says benchmarking helps to identify trends which are occurring within the business at the earliest possible time.

Once these trends have been recognised, a business owner can amend the strategic direction of the business in line with what those trends are showing, and hopefully steer the practice towards success.

“It also enables the business to identify where priority change is required in the business to increase their performance,” Fox says.

Ultimately, increasing the performance and profitability of a firm is what benchmarking aims to do. Jim Stackpool, managing director of Strategic Consulting and Training (SCAT), says benchmarking and follow-up action can increase a planning firm’s profits by 40 per cent.

Not only does it “remove the guesswork”, Stackpool says benchmarking enables people to understand the rungs they have to put their feet on to achieve growth. In his view, it also brings objectivity to an entrepreneurial industry that has relied a lot in the past on subjectivity – for example, “I think I’ve had a good week” – in measuring success.

“It gives external directors and boards another objective measurement of how the firm is performing on a quarterly, six-monthly or an annual basis,” Stackpool says.

“Those that really want to build a business that’s independent of anyone’s personal exertion, that’s generating profit growth, that’s satisfying their clients, that’s giving a good stakeholder return to all shareholders and staff, has to benchmark it and prove that they’re on the right track. Otherwise, it’s all just guesswork.”

Far from there being a standard set of yardsticks, there are thousands of ratios against which a planning firm can be measured. benchmarking process into four key areas: financials or profitability, clients, operations or structure, and people. The indicators largely centre on the profitability of the business, and include profit-to-revenue, new revenue as a percentage of total revenue, wages as a percentage of total revenue, and recurring revenue as a percentage of total revenue.

“It’s important to get an understanding of the normalised profit of a business so you can understand as an investor whether it’s providing you with an appropriate level of return,” says Nicholas Hilton, senior consultant at MLC’s adviser business centre.

“If you don’t do that then you are confusing yourself as an employee in the business rather than an investor in the business, and there is a difference.”

But dig deeper into these broad layers and the ratios vary widely. Some benchmarking tools measure profit per active client, active clients as a percentage of the total number of clients, and revenue per staff member; others measure the number of referrals, the amount of face-to-face time of all advisory staff with clients or prospects, and the number of new clients from within the firm’s target market. Rod Bertino, partner at Business Health, says the benchmarks adopted should reflect the key drivers of the business.

“Before you start thinking about what you measure, our advice to practice principals will be to overlay that with what you want to achieve in your business, and then look at what are the appropriate things to measure and appropriate benchmarks to use,” he says.

“If you look at the percentage of revenue you’re spending on your staff, there’s an industry benchmark, but it should depend on your model. If you have many different touch points, then you’ll probably have more staff than normal and the amount being spent on staff might be above the industry benchmark.”

It’s also important to remember that the financial results alone do not give a complete picture of the health of a planning firm, Bertino adds. Any analysis should include both qualitative and quantitative information.

“If you base all your decisions purely around the numbers, then perhaps you’re not getting the best possible input you could,” he says.

“A lot of the time the numbers are lag indicators – it’s important to look at more of the qualitative stuff, the actions and processes that drive the results. We believe you should be benchmarking your staff satisfaction levels such that if there are issues, you can deal with them before they become significant.”

Measuring the non-financial aspects of the business, such as staff and client satisfaction, or compliance, can help prevent employee and client turnover, or worse still, enforcement action by the Australian Securities and Investments Commission (ASIC).

“Most businesses only look at the financials; the trouble is, normally the financials are an outcome from what we do in the other three areas – client, operational and people,” Fox says.

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