Historically financial services firms have had a top line revenue focus, ranking their producing personnel based on revenues. Using a revenue ranking methodology, high performing producers may be eligible for President Club trips, payout grid enhancements, and other benefits.
While sales and revenue are not unimportant tools in measuring the performance of producing personnel, there are other metrics that should be considered and measured. Many small and mid-sized firms in our sector do not have formalized business metrics that adequately “cost” products and services provided to producing personnel. The following are some of the cost factors that apply to a wealth management organization, but some are applicable across all industries. Factors that are more suitable to a specific industry would be substituted. Some of the wealth management industry factors may include:
Transaction size: The processing and compliance costs to complete a transaction do not scale with the size of the transaction and are virtually identical for a $50,000 or $1,000,000 sale.
NIGO (“Not-In-Good-Order”): The Operations Department must spend a considerable amount of time to correct and reprocess NIGO transactions.
Compliance Issues: The resources devoted by the Compliance Department to advisors depends on the advisor and his/her customers’ profiles.
Number of Accounts: The larger the number of accounts an advisor services, the greater are the operations, compliance servicing and supervision costs.
Revenue composition: The amount of advisor revenue that is transaction-based revenue versus recurring revenue.
Payout grids: While grids drive productivity, they can also negatively impact the operating metrics for the firm.
Support personnel: Ratio of sales assistant expense to advisor coverage.
While revenue and sales rankings are useful tools to manage a business, additional information is needed. If management wants to understand the contribution ranking by producing personnel, a more fully-allocated P&L must be developed where relevant variable costs are considered. If this process in not incorporated by management, you may be making decisions that adversely affect profitability.
The schedule below presents two examples – two advisors with differing practice focus or style. The first schedule demonstrates a more basic view that is often used, and the second schedule is fully-costed, taking into account significant variable expenses. The contributions and profitability conclusions differ dramatically under a fully-costed schedule contribution versus only taking variable compensation into account.
In addition to accounting for variable costs in measuring contributions, qualitative factors that may not have direct monetary components should be considered. Such factors may include product mix, asset penetration, recurring revenue etc. Like the variable costs used in the schedule different qualitative factors would be used for other industries.
The traditional methodology of ranking producing personnel by revenue has certain advantages. It is simple, well understood, easy to produce and no explanation is needed regarding cost allocations. The disadvantages of revenue ranking are, this methodology is incomplete, may reward behavior that has a negative effect on the firm’s profitably and does not give management the information needed to make informed decisions.
