PANC 2013: Keys to Measuring Profitability

The time when retirement plan advisers looked to assets under advisement (AUA) as measurements of their practice’s success has passed, speakers on the Measuring Profitability panel said at the PLANADVISER National Conference.

A poll of the panel’s audience members found that to be true, with only 8% of the audience considering AUA to define success for their book of business. However, advisers in the audience were split on how to define profitability, with the majority looking to revenue (51%) and the remainder pointing to profitability (41%). Further, 72% of the audience members said they do not perform a profitability analysis on their clients, and 53% do not measure the effort and time they spend on each retirement plan.

For existing and new plan sponsor clients, speakers said, advisers need to figure out what services they provide; how much time, effort and travel the sponsors require; and the fees the adviser needs to charge. This can be a sophisticated process involving multiple metrics, but for practices just starting to analyze the profitability of each client, the best way to start is to simply ask each adviser to rate each client from one to 10, said Troy Hammond, president and CEO of Pensionmark Retirement Group.

“That’s how we started, and we were amazed at how accurate it was,” Hammond said. Next, Pensionmark analyzed its most profitable and least profitable clients and found “real eye openers,” according to Hammond.

Moving into more advanced profitability analysis, Hammond said, advisers should analyze time management—not each and every minute, but large blocks of time spent by senior and junior staff—such as how many committee meetings they attend each year.

Hourly rates are a key yardstick at Raymond James Financial, said Bo Bohanan, director of retirement plan consulting. “You can measure profitability several ways,” Bohanan said. “Do you ballpark your hourly rate or do detailed analysis of it? It is really important to understand your hourly rate. Is your team senior or junior? Look at the services you provide. Some advisers bill by the project, such as investment monitoring.”

“Time is your most valuable asset,” agreed Jeff Farrar, vice president of wealth management at The FDG Group at UBS. Look at how your senior and junior staff spend their time at least annually, he advised.

Moving into more high-level analysis, advisers could acquire or build a customer relationship management (CRM) software system to rate the profitability of each client by looking at such metrics as the amount of travel required, time spent and number of meetings, Hammond said. He added that Pensionmark has such a CRM program, which runs an algorithm to produce a profitability score for each of its clients.

Charging the right fees is also critical to being profitable, speakers said. For each of its clients, FDG does a “quick bottom-up analysis to figure out how to turn on the lights, and then a top-down [analysis] to look at what we would like to offer each client,” Farrar said. “The middle of the range is where you want to be.” Also, Farrar added: “Know if the client will be profitable before on-boarding.”

As to how to handle unprofitable clients, if they are a great brand name that will attract other plan sponsors to become clients, it might make sense to keep them in your book of business, Farrar said. However, that said, plan advisers need to assess whether the plan sponsor fits with their core competency, he noted.

Keeping unprofitable clients, firing them or charging them higher fees all present further complications, Hammond said. One way to handle an unprofitable client is to find them a lower-cost provider and then raising your fee, he said. “That’s a really efficient way to handle an unprofitable client,” Hammond said. It is even possible to reduce the number of client or participant meetings each year, Hammond said. Advisers could also send an analyst to client meetings instead of a CFP specialist, Farrar said.

Another way to turn an unprofitable client into a profit center is by increasing plan participation and deferrals, and encouraging participants invested in cash to move into a balanced asset allocation or into equities, Farrar said. He noted that if the adviser sees no way of remedying an unprofitable client, a graceful exit strategy is to find them another adviser.

On the flip side of this equation, if a profitability analysis shows that the adviser is making too much money on a client, “it won’t be too long before you get that call to ask about your fees,” Bohanan said. In these cases, he said, it is critical to be “very proactive” about the quality of the services you provide.

Before even responding to a request for proposals (RFP), advisers need to do a quick analysis of what would be needed to serve the plan, starting with their location and how much travel time would be required, Farrar said. Pensionmark has a sales desk that does RFP analyses and, in fact, declines just under 30% of RFPs, Hammond said.

Finally, advisers need to be cognizant of their brand and marketing efforts, as well as how much they will command in the marketplace, Farrar said. “If you have a brand that means something in the marketplace, you can charge more,” he said. “You need to build your brand and marketability.”