Practice Profitability Made Simple

By Todd Doherty

Through our valuation service, we have collect hundreds of P&L statements each year, allowing us to develop valuable insights into practice profitability. OK, I will admit this isn't a simple subject, but it turns out that it can be viewed in simple terms.  So, what's important? Client segmentation (the ratio of low and high-end clients based upon assets under management) is highly correlated to efficiency and profitability.

So here is where it gets simple - growing a practice through the quantity of clients leads to decreased efficiency and profitability, rather than growing through the quality of clients (a larger average client AUM). The inefficiency of lower end clients (clients under $100k AUM) who make up 44% of the clients in an average practice and they only produce 7-9% of the revenue. This is inefficient in its own right, but often made more so when advisors hire associates to service the bottom end of their book, creating their largest expense item relative to their lowest return. Efficient and more profitable practices by contrast, have approximately 25% of their clients in the lower end group, which would indicate an appropriate number when client segmentation is well managed.

The good news here is that the majority of practices would benefit from a strategy to improve client segmentation, efficiency and profitability. A key performance metric that we measure in relation to this is profitability per client. This is an important performance metric because it measures both profit dollars and more importantly, the value of your time. As profit per client increases you can be making more and working less or not having to work more to make more; both result in improvements in the qualitative enjoyment of running a practice!