Revenue and AUM increased last year, but your business feels like it’s getting harder to run.
Why?
In our recent Build with Purpose webinar, leadership coach Nick Davies of ProAdvisor Coach joined Scott Leak, Director of Business Development at FP Transitions, to explore the growth patterns they see across advisory businesses at every level.
Growth without a clear strategy can create urgency and reactivity, explained Nick, while Scott walked through benchmarking data from FP Transitions. Seven metrics in particular can help expose the vulnerabilities hidden by topline growth, as well as offer direction for your next move.
Net new households measure how many clients you add after accounting for the ones you lose. Scott called it one of the clearest indicators of real growth because it removes the market tailwinds that can inflate revenue.
What it can impact: Your diagnosis. During the webinar, Scott shared a scenario he sees often in his consulting work: Advisors think they need marketing help, but already serve 120 households and can't take on another. No amount of business development will solve the capacity problem. Find out why new households aren't coming in before you spend more to attract them.
In an example Scott walked through, only 5% of a firm’s clients were between the ages of 30 and 50, while 94% of the practice’s clients were over 50. Under those demographics, the firm had just about reached the peak of its value. As more clients take RMDs and pass away, it will lose assets.
What it can impact: Your timeline. An aging client base helps you understand how long you have to bring in younger households before outflows start to shrink the business.
Look at what percentage of revenue comes from your 10 largest relationships. Ideally, revenue is spread across more than a handful of households.
What it can impact: Your risk tolerance. A high concentration means losing one or two clients could significantly affect your revenue. Understand your exposure before you commit to new fixed costs.
Households per professional is a critical metric for deciding when to hire. Revenue per employee and revenue per professional add useful context.
What it can impact: Your hiring timeline. Scott's rule of thumb is to start hiring at 80% to 90% of capacity. If you wait until the team hits 100%, the people at capacity are the same people who have to onboard the new hire.
Nick also pointed out that a hire doesn't have to be all or nothing. Part-time help, shared capacity, and incentive-based pay (where compliance allows) can all be valuable additions.
In the example Scott gave, the firm's payroll was lower than peer firms of its size, with its one licensed employee earning well below the median salary. Scott flagged a likely underpayment issue and a future retention risk.
What it can impact: Your retention plan. Scott pointed to compensation structure as a key factor in getting a return on any hire. For employees with the will and skill to become owners, he recommended creating clear equity pathways.
A lean expense line might feel like cost efficiency, but significantly underinvesting in marketing and technology can affect both growth and firm capacity.
What it can impact: Your budget. During the webinar, Scott flagged these gaps as a signal of where firms may need to direct future expenses.
Scott shared a rule of thumb for dividing revenue:
One-third to owner and professional compensation
One-third to all other overhead, including marketing, technology, administrative staff, and rent
One-third to profit
He targets an operating margin of 25% to 35%. At 10% to 12%, he considers a business uninvestable for internal buyers. Next-generation owners typically borrow to buy in and pay off that debt with profit distributions; without healthy margins, the math doesn't work.
Scott also looked at FP Transitions' data on firms between $100 million and $1 billion in AUM over a five-year period. Firms with more than one owner had a 48% higher EBITDA multiple than single-owner firms.
What it can impact: Your ownership strategy. Separate owner compensation from profit distributions so you can see your true margin. If you want G2s to buy in, the business has to support their path to paying off that debt.
Looking at these metrics together requires a different mindset than looking at the business solely through the lens of an advisor. As a producer, it’s natural to focus on clients, revenue, and the work directly in front of you. As an owner, you also have to ask what the numbers are telling you about capacity, investment, profitability, and the kind of firm you’re building.
Nick recommends picking a specific date three years out and writing down what you want to be true in your business and your life. Next, work backward to develop milestones and a 12-month plan. Scott suggests blocking 60 to 90 minutes each quarter to step back and work on the business. Revisit your direction at least once a year as the firm changes.
Download our Advisor Capacity Checklist to get a better idea of your firm’s baseline across the seven metrics we explored above.