Key Performance Indicators for Advisors to Consider Beyond AUM

Although the business is evolving, many advisors still measure success by their practice's assets under management (AUM) tally. On the surface, it's easy to understand the allure of a fee-based practice that charges clients 1 percent per year and has $100 million or more in AUM.

If the advisor can keep overhead, such as office space and staff costs, fairly low, his or her take home salary can be impressive on an annual basis, assuming the AUM figure remains constant or, better yet, grows. That sounds compelling, but there are flaws using AUM has the key barometer of your practice's success. Moreover, there are other metrics to consider that when properly applied, can help advisors pinpoint areas of strength within their practice and other areas that could use some shoring up.

An issue to consider with simply focusing on AUM is the law of large numbers, meaning that as the practice grows, it becomes harder to match previous years' growth rates on a percentage basis. Think about it like this: it's hard enough to get $100 million in AUM and its even harder to double from there. To get to $300 million, that's a 50 percent jump and matching that level of growth or anything close to it, is not a reasonable expectation from year-to-year.

One avenue for advisors to move away from the crude AUM measure while assessing strengths and weaknesses in their practices is net new AUM, or the new assets that came in the door minus lost accounts over a particular quarter or year.

Not only does net new AUM give an advisor an accurate real-time look at the state of the practice, it can help in establishing more static growth targets for particular periods (quarters, annually, etc.) rather than having to frequently adjust growth forecasts.

Here are some other key performance indicators (KPIs) for advisors to consider.

Average Revenue Per Client (ARPC)

Revenue per (fill in the blank) is a metric used in myriad industries. Hotels used revenue per available, also known as RevPAR. Airlines use revenue per available seat and so on.

Financial advisors can and should be assessing average revenue per client for multiple reasons, not the least of which is the likelihood that clients are bringing in varying dollar amounts. Client A may come to the table with $500,000 in assets, but Client B may bring in $1 million. Obviously, Client B generates more revenue.

If an advisor notices that AUM and the client roster are growing, but ARPC is dwindling, that could be sign the practice is targeting smaller clients. Said another way, ARPC can help advisors figure out when it may be appropriate to capture a more affluent range of clients.

Net Profit Margin 

Without proper awareness and nurturing, it's possible that an advisory can be a money-losing enterprise. Net new AUM and ARPC are useful for assessing a practice's gross profit margins, but those metrics do not account for fixed costs, such as real estate and technology.

Data indicate that plenty of practices could use some frugality because even as client rosters and median assets under management per client have been rising in recent year, practices' operating profit margins have been declining.

Used in conjunction, AUM, net new AUM, ARPC and net profit margin are among the metrics advisors can deploy to effectively manage costs and scale growth to enhance their services and their bottom lines.

Related: Wealth Management: Old Lingo Enters a New Age