For any enterprise that’s serious about meaningful and sustainable growth, getting a grasp on how to better control these two critical financial metrics is essential. As you grow, you’re facing a cascade of important decisions:
- Should I add staff and when?
- Do I need to start thinking about more office space?
- When is it advisable to merge or acquire someone in another location?
While profitability can certainly be a useful financial metric, it’s your business’ capacity and productivity which are the two inextricably linked measurement tools that will give you the clearest insight into making those types of mission critical decisions.
What is your firm’s productivity and capacity today? They’re very simple to calculate metrics that will allow you to more accurately focus forward and scale forward. If you’re currently generating $1MM in revenue as an organization and there are two advisors (whether equal partners or a senior advisor and junior advisor) your professional productivity is $1MM/2 or $500K each. As you grow, what’s going to become the temptation is to say, “I need more assistance around here. I feel like we need more capacity.” But unless you know how that easy to calculate productivity number has changed over time, you’ll be making a decision based solely on feel.
Armed with these metrics, however, you can make a more informed decision. Perhaps you determine that your initial instinct was right and that you have become busier, with revenue growth to $1.4MM pushing productivity per professional up to $700K. But that doesn’t answer the question of whether you should hire and/or whether you need to hire someone who’s already managing around $500K (the firm’s baseline productivity target) or if you would be better served to hire someone who doesn’t currently manage any assets to come into the firm as a service advisor to free-up some of the lead advisors’ capacity.
The “old school” approach has always been that a new advisor hire needs to bring enough business to pay their own way. Today’s more forward-thinking advisors, however, have begun to step back and look at the enterprise as a whole. To them, ensuring that the organization is profitable and productive in the aggregate is far more critical. Certainly, you would like for each individual to also be profitable and productive, but this macro approach allows you more flexibility to do what’s in the best interest of the firm AND your clients.
You could potentially go out and hire that individual with no clients as a service advisor and the productivity per professional number would only decrease to $466MM (less than 10% below your target). Of course, you’ll first want to ensure that any additional hire fits into your overall budget. Ideally as a rule of thumb, professional compensation (including the principal’s compensation for time working in the business) shouldn’t exceed 40% of your firm’s revenue.
Bigger really is better!
What many advisors don’t realize is that in the vast majority of cases, productivity actually goes UP as your organization gets bigger. In part, this is because you are hiring more staff around you who are also productive. It’s the essence of the interdependent team concept we passionately advocate for – together you can do more and achieve more than any one individual can do on his or her own. The other driver of this phenomenon is your clients. As you get bigger, you invariably expand your expertise, capabilities and service offering. Not only does this assist in attracting larger clients with more complex wealth management needs, it compels you to be more disciplined in going after higher value clients and saying “no” to lower value clients in order to preserve capacity for better opportunities.
It takes a lot of time and effort to effectively manage a large team. But the benefit of rising productivity, coupled with revenue per advisor increasing as the number of clients per advisor is decreasing (thanks to higher value clients) means that you can spend more time with fewer clients and make the same amount of money. An optimal outcome for both you and your clients.
Coaching Questions from this article:
- Based on historical data, what would you determine to be your organization’s optimal productivity per professional?
- How does your current productivity compare, and what’s your plan for building future capacity and capability on your team?
- How can you improve your strategic hiring plan based upon your current plan for future growth?
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