Most if not all owners of independent advisory firms focus on growing their businesses. Generally, that is a good thing: growth is usually a sign of a healthy business.
However, (you knew there would be a however) because most owners of independent firms have little or no formal business training, there’s a lot of confusion about just what “growth” is, and how it’s measured.
Rhe current trend among larger advisory firms is to reach $1 billion in client AUM. That’s a worthy goal, if it’s accompanied by reaching some other goals at the same time.
For instance, many firm owners who have set their sights on high AUM or revenue goals (which basically are the same thing), have been disappointed when they attain said goal. Usually, that’s because they find themselves making the same or even less money than when their business was smaller.
The takeaway here is that profits— not revenues — are the measure of a healthy business. I know that many of you baby boom firm owners (who still wear tie-dyed T-shirts under your white shirts) believe that profits are the devil’s instrument.
But, as any second-year B-School student can tell you, if the profitability of your business isn’t growing, there’s something wrong.
Here’s what I tell my clients to help them refocus on the bottom line:
Don’t think about profits as how much you make. Contrary to what some firm owners believe, you don’t have to take home all your firm’s profits.
Instead, you can reinvest some, or even all your annual profits back into your business to help it grow. New and/or better marketing, technology, and training are typical improvements, as are new employees and branch offices.
Profitability is a measure of efficiency. Rather than thinking about profits as ill-gotten booty, see them for what they are: a comparison of the cost of your services with how much people paid for them.
As a business owner, it’s one of your primary jobs to continually look for better, cheaper, and faster ways to deliver your ‘product” — which in your case is financial advice. Your report card is the profitability of your business.