Executive Summary
Over the past decade, it has become increasingly popular for publications to cite the assets-under-management (AUM) of an advisory firm when quoting from someone at the firm. Ostensibly, an advisory firm's AUM is meant to connote its success and relevance; the larger the AUM of the firm, the more the apparent success of the person being quoted, and the more we should all pay attention to what he/she is saying. Or so the media seems to imply.
Of course, the reality is that AUM says little about the actual quality of a firm's financial planning services or the success of its clients; in fact, it doesn't even indicate whether the firm does financial planning in the first place! Accordingly, some has suggested that better alternatives might be to look at the years of experience of the planner instead, to adjust for and acknowledge the fact that advisors can have excellent knowledge and insight even if their personal goal was not to grow a huge pile of AUM (or for that matter, in the event they decided not to even run an AUM business model in the first place!).
Yet at the same time, this raises the question: what should we be using to evaluate and measure the success and quality of a financial planning firm? After all, if we can't even measure it, how can we possibly manage it and work towards improving it? Would a better alternative be to look at client satisfaction surveys? What about the percentage of recommendations that are implemented? Or the time horizon it takes for them to be implemented? How do you measure the quality and success of your financial planning services for your clients?
Business Metrics For Success
In today's environment, one of the most common measurements for the success of a financial planning firm are its business metrics, most notably assets under management, or sometimes the years of experience of its advisors. Of course, experience alone is not necessarily an indicator of quality, and AUM alone does not communicate the quality of a firm's financial planning offering. At best, AUM is simply an indicator of the firm's ability to attract and retain clients - which does imply something about the service offering and client satisfaction - but in the context of financial planning, says little about the quality of the firm's financial planning in particular. After all, AUM is such a broadly used business model in the pure-investment-management business that there's not even an indicator from the firm's AUM whether it does any financial planning in the first place! If you know already that the firm does financial planning, knowing its AUM can tell you something about the firm - which is why, as I've noted in the past, I still often ask firms about their AUM to better understand their business - it's nonetheless a poor indicator of quality. Especially given the reality that many firms choose to become large or small based on the goals, needs, and decisions of their founders... many high quality firms choose to stay small, whether because the owner is happy with the income from the firm as is, because the owner doesn't want to invest into greater growth, or perhaps simply because the owner doesn't like to manage a large number of people and doesn't want to be put in that position. Yet those decisions about the size of the firm, relative to the goals of the owner, once again say little about the quality of the firm.
At the same time, I will admit that I do think business metrics have a place in the discussion about measuring the success and quality of a financial planning firm, or at least providing context to it. Because the unfortunate reality is that I've seen a number of financial planning firms that provide some outstanding quality - so much, in fact, that the only way it can be done is that the firm "overservices" its clients to the point that the advisor is actually paid less than the going rate for his own services, after netting out all costs. Now at a personal level, if an advisor wants to provide so much service for clients for a below-market level of total compensation, that's his/her prerogative. But given that no one else could be hired to do the same services for that price, it's hard to see how a firm that is blatantly unsustainable should be used as a benchmark for success. By contrast, when I see a firm that delivers a high quality of financial planning services, and does so with some size and multiple advisors, to me that is a signal that the firm not only has figured out how to deliver quality, but to do so in a sustainable manner, which is important for both the continuity of the business and the continuity of those services to the clients themselves. After all, a financial planning business that is not run to be profitable is a business that is not sustainable, which ultimately is a risk to both the planner and the client.
Nonetheless, the question remains - how do we even know what "success" means, to determine whether it's being done profitably and scalably, in the first place?
Client Satisfaction Surveys
Perhaps one of the simplest ways to determine the quality and effectiveness of a firm's financial planning services is simply to ask its clients - in the form of a regular client survey - what they think. Of course, the reality is that because there's no "standardized" survey assessment tool used across all financial planning firms, which means a survey tool would have limited effectiveness is really determining whether Firm A really delivered higher quality services than Firm B. Even if Firm B has higher average "satisfaction" scores, without knowing if the questions were asked in a similar manner, any comparisons would be apples-to-oranges. And of course, the reality is that satisfaction is often something we report relative to our expectations, which means if Firm B sets the expectations bar much lower than Firm A, then Firm B could have higher satisfaction even with more mediocre services because Firm B exceeded the low expectations they set while Firm A struggled to achieve the higher level of quality and service they promised to deliver (even if Firm A ultimately did a "better" job to an objective third party).
Nonetheless, it's still somewhat astonishing that regular client satisfaction surveys are not a standard for measuring success and quality in financial planning firms, as they're a standard in virtually all other businesses and industries (and even amongst the larger institutions that provide financial advice!). And it's not for a lack of tools and solutions; a basic client satisfaction survey can be administered at a negligible cost using a tool like SurveyMonkey, and firms serious about a more robust process can explore working with an established solution like the Client Audit service from Advisor Impact. How can any firm claim to provide a quality service if they don't have a systematic process to even determine whether their clients think the service is all that it can/should be? Certainly, client retention is some basic indicator of this - if clients aren't leaving the firm, presumably the service isn't horrible! - but there's a big difference between "excellent service and quality" and "good enough that clients don't fire you."
Ideally, though, a standardized client survey process would be established that actually provides a consistent tool that can be applied across multiple firms, allowing for a clearer comparison point for consumers. Given the breadth of services that advisory firms offer, though, this may not be realistic in any near-term future. Another alternative that has been proposed by firm would be a form of "peer review" process that could establish the depth and quality of a firm's financial planning services above some relatively high (or at least some minimum) threshold. Firms that go through the peer review process might be "certified" or otherwise receive some kind of "gold seal" of approval; while such a solution wouldn't necessarily speak to actual client satisfaction, it would at least provide some third-party means of evaluating the depth and quality of a firm's services and their capabilities and expertise.
Measuring Financial Planning Results
Perhaps one of the most straightforward ways to measure the success and effectiveness of a financial planning firm, though, is to simply better track the results of the financial planning process with clients.
For instance, while financial planning firms routinely provide recommendations to clients, how often do firms actually track the percentage of recommendations that the client ultimately implemented, and the time horizon over which they were implemented? Think about it from the (prospective) client's perspective - would you rather work with a firm where clients only implement half the recommendations, or where clients implement 90% of the recommendations? Would you prefer to work with a firm where most clients take 2 years to get their financial affairs in order, or a firm where the average client is fully implemented in 6 months?
To be fair, the nature of such a measure would probably mean it's not the best way to compare firms, as some differences between the firms may simply be attributable to differences in the types of clientele they work with (retirees who have a lot of time available may tend to implement more quickly than working with harried young parents or overworked entrepreneurs). And compared across firms, such a system could easily be gamed (firms could be perversely incentivized to provide fewer recommendations that are easier to implement to keep their implementation ratios and timelines high). Nonetheless, the fundamental point remains that one of the key markers of trust and satisfaction is the ability to deliver results, yet remarkably few firms do anything to actual measure the results of the recommendations they provide to clients, not necessarily to take any accountability for the lack of client follow-through.
Of course, clients come with a wide range of problems and challenges of their own, so success will never be immediate implementation of 100% of recommendations. But the fact remains that when the success of financial planning is all about behavior change, it's not clear how firms can ever become more successful and effective at getting clients to implement those recommendations if they don't measure the percentage of recommendations implemented and the time it takes for clients to do so. How can advisory firms be held accountable for the effectiveness of how they deliver financial planning if they don't measure the effectiveness of the techniques being used? For instance, if a firm finds that its retirement recommendations tend to generate quick client follow-through, but its long-term care insurance recommendations are rarely implemented, that provides valuable feedback to the firm that its process for delivering LTC insurance guidance to clients may need to be fixed. But only if the results are being measured in the first place!
Perhaps once we become more consistent in measuring what terms like "success" and "quality" mean in the first place, we'll finally begin to come to some agreement about how to determine what it means to have the "best" and "highest quality" and "most successful" financial planning firm!
How do you measure the quality and success of your financial planning services for your clients? I hope you'll share in the comments below!
I agree that AUM doesn’t tell the whole story — especially if a firm’s business model (for example) works with the middle class or if the firm is starting out. Besides AUM, to look at the health of a firm, I look at how many hours the owner of a firm is working, the turnover of staff/consultants, and 54 other important areas that can’t always be quantified. I have the owner complete a questionnaire and also have all staff/consultants and ideal clients complete it, too. This is the start of open management (getting the owner start to take the claws off and delegate more) and is usually an eye opener for the owner since their staff, when asked, usually has a different opinion of how they’re doing!
Even when I help clients set goals (which should always be SMART goals) I find that some goals take a bit of creating license to get them into that format. For example: “I want to see my staff all getting along” ( I change it to “I want to see my staff of 8 getting along by ___date.” and then learn what “getting along” means to them) OR I want to spend my time only working with clients (I want to spend ___ a week working with clients by ___date___”) OR I want to go on vacation (I change to I want to take 2 weeks off twice a year by _date”)
Micheal you also mentioned “a financial planning business that is not run to be profitable is a business that is not sustainable,” I’d add that “it’s a nonprofit”; which is a total different business model and structure! AND even nonprofit Executive Directors make money (and you’d be surprised at how much many EDs earn! )
I know that you wouldn’t be surprised to know how many firms are “only making enough” (I mean, does “enough” mean) for the owner to get by. The “JOB” model, doesn’t last for long as a business model. FAs get frustrated, usually change custodians a few times (it must be their fault), and then either get back into “Corporate America” or get so frustrated, they leave the business (what a shame).
As far as measuring success, it really means something different to every person I meet! And some clients feel their FA has been ‘successful” when they get a plan, regardless of if they’re using it or not!
P.S. All my newsletter subscribers get a copy of my Best Practices assessment. 🙂
Client retention is an important measure of quality. If people are leaving, where are they going and why? Fortunately our firm has a retention rate in the high 90% range (100% in 2013). Also, lost Prospects. If a prospective client didn’t hire us, who did they hire and why? Staff retention can also be a measure of a firm’s quality.
Congrats on your accomplishments!
IF a firm has a niche and ideal client, then measuring the prospects who didn’t turn into clients (etc) is a good thing. After all, you’ve pre-screened, the stranger and they’ve landed as a prospect.
But many firms still look at prospects as “anyone who breaths” and that would change the prospects to client measurement..
How about having client specific goals that are agreed upon by the client and then take annual survey of clients regarding their goat attainment to date as it relates to each specific goal. This score for all clients would be tangible basis for comparison along with perhaps a net promoter score of whether the advisor would be recommended to others could set up an analytical framework for comparison of what advisors are suppose to do i.e. lead clients toward attainment of their financial goals. Wouldn’t this result in some honest conversations rather than sell jobs.
For most of my clients, their top level goal is not running out of money before they die…
Professional standing and client satisfaction are two different things, expert assessment and client perception. The industry has fought legitimate expert standing against clearly delineated statutory requirements for fear it will preclude the vast majority of professional designations which fall far too short of fiduciary standing. Consumer assessment of service never incorporates objective assessments of investment performance as it assessment is cont4roled by the broker/advisor.
The SEC approved Dalbar client satisfaction ratings of advisors which could be used by advisors without violating SEC advertising rules–but without an objective assessment of expert standing, it largely was based on very soft values which had nothing to do with what level of advice is statutorily required.
Importantly, the economic vitality of an advisory services firm as a business, to include earnings , margins, etc. in addition to AUM is important.
This very important question of how do we measure success reinforces how early the industry is in the emergence of large scale institutionalized support for advisory services, separate and distinct from the brokerage industry selling advice as a product.
Excellent question that bears out the many areas in which the industry excel in ways not required in a brokerage format.
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Good one Michael. This is probably something fin planning firms shud invest in doing. Does this improve valuations? Maybe this might interest you. We follow a process called the FAN assessment. FAN stands for Freedom, Achievement and Njoyment. Clients usually enrol to gain freedom from something that worries them. And they seek to achieve their financial goals. Through a combination of a self appraisal of the feeling of freedom and a more technical and robust progress made to achieve goals measurement the F and A scores are derived. And the last score is obviously feedback on how clients have njoyed working with us.. we use survey monkey. Probably a bit simplistic, but works for us well. Our team appraisals are aligned to the percentage of FANs to total no. of clients metric. Do u think this could be better?