Why Benchmarking Works (And Where It Fails)


Still thinking about benchmarking as a tool for advisors to find their place in an industry that gets more fragmented all the time.


Of course a good advisor wants the best possible outcome for his or her clients first, and then making his or her practice more profitable comes after that.


But even within that somewhat rarefied realm, most advisors have room to improve in one direction or the other. That’s where the benchmarks come in.


And the benchmarks are model-agnostic. Whether you’re a fee-only planner or the last of the commission-only brokers, AUM is AUM and revenue is revenue.


Fun fact: At this point in the game, everyone in the industry knows that transactional business -- commissions -- is yesterday's news, the victim of its own commoditized one-size-fits-none success. 


The Russell benchmarks I talked about last week don’t actually distinguish between commissions and management fees or between reps and IAs.


As far as they’re concerned, a captive 12b-1 trail is the same thing as an annual asset management fee. It’s all "recurring revenue." And a quick commission is the same thing as a fixed fee for setting up a financial plan.


We can talk about whether that's a false moral equivalence, but I bring it up here because what Russell found is that the giant multi-advisor shops -- which include the wirehouses and dual-registered IBD/RIA hybrids -- derive 81% of their income from recurring revenue. 


The solo practitioners, regardless of tenure in the industry, only derive 70% of their income from recurring revenue.


In fact, the bigger the firm, the more successful it's been in converting one-time business into a long-term relationship.


Where does your business fall? If you're fee-only, you know. If you do a lot of one-off planning work, it gets a little stickier.


Either way, if you love your business and your clients love you, that's great. I couldn't change that even if I tried, and besides, at A4A I'd just be preaching to the converted anyway. 


But what I can do is suggest ways to improve the business that grows up around and supports your ethical code. 


Sometimes that means broadening or switching models. Sometimes it doesn't. We won't know until we measure.


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