Background of numbers seamless pattern calculations

This article appears in the January 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

“Coach’s Forum” is a place to ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community with a common interest in making financial advisory practices as effective as possible.


I have just completed my annual planning session with my team. Thanks for the suggestions you made in your most recent column about planning for a post-Covid business (December 2021).

What struck me as I went through the planning exercise is how little I actually know about our business. Sure, I can tell you what our assets under management (AUM), revenue and expenses are, how many clients we have, and so on, and I can make assumptions in my planning about increasing or decreasing those numbers. But how do I know if my growth projections are too high or too low? That my business is truly profitable? That my practice is just as good as (or better than) others like mine?


First, congratulations on questioning the value of your annual planning. In a presentation I’ve given about things that top-performing advisors do, guess what No. 3 is? Understanding the metrics of their business — the relationship between resource allocation and results. Top performers everywhere recognize that knowing their “numbers” enables them to control the momentum of their business.

So, which numbers should you know? You already have most of the data: for example, AUM, revenue and expenses. You just need to rearrange it to calculate some telling statistics. There also is other information that you may want to begin tracking to aid in the review of your business’s progress.

Let me run through the revenue, profitability and productivity measures we use for practice valuations.

Assets under management

AUM is an important measure because it tells us how big a practice is and where it fits in the marketplace. Three things we like to know about AUM are:

  • What’s the growth trend — that is, percentage change year-over-year for the past three to five years
  • Where did gains come from — new clients, existing clients, market gains, etc.
  • What’s going out the door — client withdrawals, transfers, lost clients, etc.

Our timing is perfect for your question because some new benchmarking research on advisory practice performance, the 2021 Pricing & Profitability Update, was just released by New York-based IN Research. The study has been running for 30 years, and while it is based on data collected from independent advisors in the U.S., the findings are useful to Canadian practices. Here are some selected insights. I have rounded the numbers to help us see the big picture:Total average AUM growth in 2020 was 11%, driven by 5% from new clients and 7% from portfolio gains. (One per cent is lost as a result of declining assets among existing clients through withdrawals or the termination of relationships.)

What lessons can we take from this? I know the data is relatively short-term, but what jumps out at me is that the traditional ways of building a practice — through referrals and new client acquisition — are at risk of being offset by a simultaneous decline in assets. Assets decline when existing clients draw down portfolios for retirement, transfer wealth to children or die. In a mature practice with older clients, we can only expect this trend to accelerate.

Of course, the other caution is that while market gains can certainly accelerate your business over time, you are better to focus efforts and resources on things you can control.


Total revenue is important because there should be some correlation between AUM and revenue. What is more important, though, is the ratio of recurring to non-recurring revenue. With the wide-scale trend toward asset-based or fee-based compensation models, we are seeing increasingly large percentages of recurring revenue, which is a good thing if you want to maximize the value of your business.

While I despise rules of thumb for practice valuation, here’s one that generally holds true: a dollar of recurring revenue is worth three times as much as a dollar of non-
recurring revenue.


Revenue and AUM are what we use to measure size in our industry, but they don’t tell us much about the profitability of a practice, which is what determines its value at the end of the day.

For as long as our firm has been doing practice valuations, we have used a “model practice” as a comparison to determine whether the practice we are valuing is underperforming or overperforming the benchmark and, correspondingly, would therefore warrant a premium or a discounted valuation.

We developed our model from the Pricing & Profitability Update, and I am happy to say that, in broad terms, the latest research confirms top-performing practices continue to have approximate expense ratios as follows:

  • Overhead (office, staff, operations, etc.) = no more than 35% of total revenue
  • Advisor compensation (draw/salary) = 35%–40% of total revenue
  • Owner compensation (profit) = at least 25% of total revenue

It is not a widely employed practice in the investment industry to separate “advisor compensation” from “owner compensation” because most founders/advisors simply take home “whatever is left over” after operating expenses are covered. In valuing a practice, however, we must consider all the costs of running the business, including the provision of advisors’ services.To put this in perspective, a founder/advisor in a solo practice should expect to earn 35%–40% of revenue (after dealer share) for their advisor role, and at least 25% for their owner/management responsibilities, for total compensation of 60%–65% of revenue.


Productivity represents the ability of an advisory practice to optimize the time and talent of its team and is the measure that defines top-performing practices. Key performance indicators (KPIs) include:

  • Return on assets (ROA, a.k.a. turn rate) = total revenue ÷ AUM. Ignoring volume discounts for large portfolios, the industry average, using total gross revenue before dealer share, is about 1% or 100 basis points (bps). Using net-to-advisor revenue, ROA averages approximately 0.7% (70 bps).
  • Client households per advisor = total clients ÷ advisors. While many advisors have hundreds of clients, the research indicates that 120 to 150 is the optimal number for one advisor to manage effectively, depending on the service level agreements in place.
  • AUM per advisor = AUM ÷ advisors. This ratio combines clients per advisor and average account size to indicate scope of responsibility within the practice. A solo advisor has 100% responsibility; more than one advisor means a shared, but not necessarily equal responsibility.
  • Revenue per advisor. Similar to above, but more important because large accounts don’t always directly equate to high revenue.
  • Revenue per client. A good indication of the market in which the advisor operates and effectiveness of client relationships.
  • Profit per client. The most important measure because profitability determines practice value. This indicator brings service costs into the picture to determine whether adding a potential new client improves or reduces profitability.

Hopefully, this gives you some ideas about the metrics you can track to make sure your practice is going in the direction and at the pace you want.

Let’s also recognize the variability of the business as markets gyrate, the economy fluctuates and rules change. Don’t be overexcited or overly discouraged if, in the short term, you aren’t hitting your KPIs. Stay the course for the long run.

George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to George’s practice-management videos can be viewed at