February 24, 2012

Why You Should Benchmark, and Tips for Effective Benchmarking: Pt. 1

Growing your RIA business in the face of rising competition for clients, assets and staff has become more challenging than ever. One of the best ways to help overcome this challenge is to benchmark your business performance. Armed with valuable business information, you can set out to make strategic moves that can give you a sustainable competitive edge. 

In this, the first of a two-part blog, we’ll look at why benchmarking is so important for advisory firms today, ways to benchmark intelligently and how to turn the results of your benchmarking efforts into an action plan for your firm. 

Why Benchmark?

The fact is, you need to know where you stand before you can map out your strategy for future growth. Benchmarking gives you a comprehensive view of your practice’s current health by compiling performance data, financial results and other metrics. 

By comparing your results with those of other advisory firms (in your geographic area or with similar asset levels), you can assess how you’re doing in various categories relative to your peers and competitors. Those insights will enable you to identify areas of strength within your firm so you can take steps to maintain your advantages, as well as spot areas of opportunity where you can make improvements. 

Benchmarking can also serve as a rallying tool to drive your team toward your objectives. When your partners, staff and other key people know the firm’s strengths and weaknesses, they gain much needed clarity about what they need to do to take the firm to the next level—and become motivated to make it happen. 

Tips for Effective Benchmarking

Your benchmarking efforts and the specific metrics you track should be informed by where your practice is in its lifecycle. For example, early stage firms and advisors who have recently transitioned to an independent model often are most concerned with maximizing revenue. By contrast, relatively mature practices may care more about achieving scalability and efficiency gains. 

That said, certain metrics are almost universally tracked. Some examples include growth-oriented drivers such as revenue growth, asset growth, number of new clients and new client acquisition methods (such as referrals from existing clients and referrals from other professionals). Tracking these and similar growth metrics enables you to identify and focus on the most valuable sources of new business within your firm. Another key area measured by many advisors is productivity. Metrics such as “revenue per client-facing professional” and revenue per employee can help determine your practice’s overall levels of effectiveness and efficiency.

Additionally, attitudinal metrics (such as a firm’s top strategic priorities for the next 12 months, its biggest perceived barriers to growth and its key enablers of growth) can also be valuable (See sidebar). Although such metrics are “softer” than quantitative measurements, they allow you to learn what issues, initiatives, predictions and concerns are on advisors’ minds. 

Regardless of the metrics you select, it’s best to compare your results with those of appropriate peers—that is, firms that are similar in size and business model to your own. One way to identify such firms is to participate in a peer study group in your area. Another option is to read benchmarking studies that examine the metrics and best practices of successful firms and see how you stack up. You may even want to participate in a formal benchmarking study, which some firms (including Schwab) conduct regularly. Choose a study that tracks metrics that are relevant to your situation, surveys firms with profiles that are similar to your own, and offers practice management insights based on the top findings and analysis of your firm versus the other participants. 

Taking Action

Of course, knowledge without action won’t benefit your business. You’ve got to use the information you gather through benchmarking to make smart strategic moves that will enhance your success.

Chances are good that benchmarking will reveal multiple areas of your business that can be strengthened. For example, your results relative to your peers may present opportunities to raise your minimums, focus on growing a particular client segment, boost client response time, increase your use of productivity-enhancing technologies or take numerous other actions.

It’s important to tread carefully here. Do not attempt to tackle everything en masse. The key to a successful action plan is to focus on just one or two initiatives that the data indicates will generate the biggest return on your investment of time and resources, and will address your most pressing goals. 

Once you choose your primary initiative, develop an action plan that includes short-, medium- and long-term goals and a timeline for making them happen. If you need help creating a plan, there are plenty of resources. Your best bet will be to get insight and advice from members of your study group or other advisors you know, your partners and employees, your custodians and other practice management experts.

In Part 2 of our series, we’ll report on key findings from the 2011 Charles Schwab Benchmarking Study, in which Study participants reported their top growth drivers and barriers.

This month, Schwab will launch its 2012 RIA Benchmarking Survey* for those that custody with the firm. (0212-1057) 

*The RIA Benchmarking Study from Charles Schwab comprises self-reported data from advisory firms that custody their assets with Charles Schwab. The Best-Managed Firms are the top 20 percent in productivity, profitability, and revenue growth, calculated after removing those with less than $1 million in revenue. Responses were collected during February and March of 2011.

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