In our previous post, we did a deep dive into the revenue data of a hypothetical advisory business. We started with a superficial view of the advisory’s cash position. Things became more interesting when we peeled back some of the layers. It quickly became clear that different advisers were following very different sales strategies, leading to a distinct product emphasis. If you haven’t read the post, you might want to check it out before dipping into the second part below.
The upshot is that fine grained analytics analysing a practice’s product split gives you important, actionable insights. However, analysing product split is only half the story. After all, those products don’t exist in a vacuum, they’re held by clients. And understanding who those clients are, and how the book is weighted, completes the picture. Analysing products and concentration holistically gives you a robust data set to help you understand how sustainable the practice really is.
Let’s dig in.
Why the 80/20 split matters
Financial advisers will be familiar with the ‘80/20 principle’ – a practice earns 80% of its revenue from 20% of its clients. Obviously, the 80/20 principle isn’t a scientific law but a basic rule of thumb. It can be a very useful guiding principle: the practice with more clients isn’t necessarily the practice that generates higher revenue.
Why is the 80/20 principle worth thinking about? Because analysing the composition of your book, on a granular data-driven level, can explain the underlying revenue dynamics. Practically speaking, by looking more precisely at how revenue is generated over time, we can see some of the fundamentals required for building a more sustainable and resilient practice.
Comparing apples with apples
Consider the following scenario. Here we compare three advisers according to revenue generated and the number of clients they manage.
Here we can clearly see that Adviser 1 manages fewer clients but generates more revenue.
Without being too simplistic, we can clearly appreciate that Adviser 1 is doing something right.
That is, from this high-level view, we have actionable data. We can start to ask questions like what strategies Adviser 1 uses, what products they focus on, and how they market their services.
Of course, elements of Adviser 1’s success may come down to luck or skill or some other set of factors that can’t simply be replicated. However, on aggregate, as we look at advisers that generate more revenue per client, we can certainly see patterns that will inform our fee strategies.
A more objective performance benchmark
The data thus gives us two powerful insights: It tells us which advisers are outperforming their peers. And it can reveal instances in which advisers are underperforming, despite apparently being very successful at growing the book.
However, this high-level picture is not the whole story. Things get even more interesting when we look at the data in more detail.
Who is the 20%?
Let’s consider the practice as a whole. If you examine the chart below, you see that nearly 80% of revenue is generated by 20% of clients, as you’d expect given the 80/20 principle:
Now, let’s use Commspace’s intuitive Revenue Analytics dashboard to consider revenue production not just by client count but also by age group:
An interesting pattern emerges. By far the largest number of clients fit within the 30-39 and 40-49 age groups. However, the most revenue is generated by clients in the 60-69 age bracket, even though that bracket includes fewer clients.
So what is the actionable insight? Superficially, one might be tempted to say that the mark of a successful practice is that most of its clients are aged 60+. However, the analytics tell us a richer story.
Demographics aren’t static
Let’s take another look at the chart. Clients closer to retirement age are the most profitable for an IFA practice that focuses on investments, as they have had time to build up wealth. Whereas younger clients focus on shorter term products as they start to build a portfolio. From the age of 75+, the number of your clients decline and therefore your total revenue, but the average income per client remains level.
In order to sustain revenue over time, you can’t just rely on a small cohort of senior clients. You need a diverse and sustainable client base that will keep generating revenue over time.
Strategic use of revenue analytics enables you to adopt strategies that produce more revenue while also considering the long term resilience of your practice.
Where does the concentration risk lie?
Of course, production and age are just one dataset that can help you understand what’s going on under the hood of your practice.
Each practice is highly multidimensional, with different strategies, revenue models, client demographics and a focus on specific types of products.
Commspace developed intuitive Revenue Analytics tools that make rich data sets simple to access and easy to understand.
So what other dimensions can Revenue Analytics technology reveal? We dig into the subject some more in an upcoming article – “Buy” the book: How data analytics help IFAs manage acquisition risk.