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Performance Reporting for Your Practice

The mechanics of performance reporting can be invaluable to assessing your practice.

Helen Modly, 12/17/2009

The mechanics of performance reporting is not only important for your clients; it can be invaluable to assessing the true "performance" of your practice.

As experienced business owners, we have always kept a very close eye on the financial aspects of our practice. We routinely compare our metrics with the results of industry surveys, such as those performed by Moss Adams and others. In years past, we struggled with their methodology of tracking the change in assets under management from the beginning to end of the year.

We were accustomed to tracking the beginning and ending AUM; we maintained a rough list of new client money brought in and the amount of any client terminations.

The Survey Formula
Total of AUM at the beginning of the year
Plus: New money received from NEW clients
New money received from EXISTING clients
Less: Withdrawals from TERMINATED clients
 Withdrawals from EXISTING clients
Plus: Interest Income
Dividend received
Realized Gains and Losses
Less: Management Fees
Plus: Unrealized Gains (or Losses)
The sum to equal AUM at the end of the year

Look familiar? This is exactly the format that most performance reporting software uses for the portfolio activity summary report that many of us use as part of our quarterly performance reports to clients. Starting in 2007, we decided to run this report on a consolidated basis on a master account we created that included all of our client accounts. This report gave us beginning and ending values, dividends, interest and gains/losses, however; the rest of the information in the formula was all in a lump.

Teasing it Out
Using a report that summarizes all portfolio transactions by type, we can look at all "long-in" transactions that represent money or securities moving into accounts. By running that report on a group that consists of only new accounts during the period, we can separate those transactions from the client base as a whole. We use the same process to separate all "long-out" transactions into new client and existing client, as well. Normally, our "transfer in and transfer out" transactions between accounts will wash. Now, we maintain a spreadsheet of our AUM metrics using the above information on a monthly basis.

In addition to providing us with the financial data we needed to track, this process also serves as a first check that all our accounts are reconciling each month. It allows us to spot issues such as residuary balances in closed accounts, incorrectly coded transfers and other posting problems before we run our client reports.

The spreadsheet also tracks the number of client relationships we have. By adding another column, we can reflect the number of clients represented by the new funds received, adjusted by any terminations. Maintaining an accurate client count is needed to identify the average AUM per client, both new and existing. This is another of the metrics that these practice surveys measure and it helps us to confirm that we are continuing to increase our AUM per client, which is also one of our business goals.

Lessons Learned
The time involved with tracking these metrics is minimal compared with the insight we have gained from watching the trends over the past three years.

Fee-only advisors in an AUM business model can be easily seduced during periods of market growth into thinking that their business metrics are solid. Unfortunately, many are not able to pinpoint exactly the sources and risks to their growth of AUM. For us, the most powerful lesson learned was the astonishing amount of client withdrawals we sustained in 2007.

Anyone entertaining the idea of becoming a "retirement income" practice should take note. Retired folks spend their money. We knew what our monthly planned client withdrawals were, but had never added up all the so called "non-recurring" withdrawals our clients made. It seems that in 2007, everyone needed a bigger home, a new car and a cruise to Alaska. These "extra" withdrawals have continued throughout 2008 and 2009, but, thankfully, at somewhat lower levels. It was no surprise that our retirees were withdrawing money, but the magnitude of what was slipping out the back door was not being factored into our goal setting.

Another interesting bit of information we gleaned is the importance of dividend and interest rates. We all know how tough it is to generate investment income for our clients, but the historically low dividend rates (the dividend rate on a basket of S&P stocks is less than 2%), and interest rates (about 3% on a 10-year Treasury) means that our asset bases are receiving fewer dollars also.

Going Forward
Like most advisors, we set annual goals for ourselves, including the amount of the AUM growth we'd like to see, since 98% of our revenue is AUM-based. We now set our growth goals in terms of "Net New Money," which requires us to increase the goal for "New Money from New Clients" to take into account the adjustment for withdrawals. We normally are the only advisor our clients use, so new money from existing clients tends to come from either 401(k) rollovers at retirement or inheritances, both of which are beyond our control with respect to timing. Market appreciation, if it occurs, will be the gravy that makes a good year into a great year.

The 25% drop in AUM we saw earlier this year was a sober reminder that our business model relies on many, many factors out of our control, such as retiree withdrawals and market performance. Now we are aware of just how important our marketing activity levels, as well as the effectiveness of our activities, are in terms of meeting our numbers. Like most advisors, marketing was a hit or miss effort for when we had a little extra time on our hands. Passively relying on referrals is no longer a luxury any advisor can afford.

Most importantly, we learned how critical it is to focus on the two activities that we can control. First, we need to develop and maintain effective marketing strategies to continue our success in attracting new clients, especially during those several years before retirement. Second, we must continue to improve upon our level of service to retain the clients we have.

If you don't already do performance reporting on your practice, you are overlooking a valuable tool.

Sandra Atkins, CPA/PFS, also contributed to this article. Atkins is president of Focus Wealth Management and has been a business owner for more than 30 years. She is a member of the AICPA and NAPFA. She and Helen Modly can be reached at info@focus-wealth.com.

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