What are the best ways to measure the profitability of your practice? A March 25 panel discussion at the NAPA 401(k) Summit offered some tips.
One method is to look for a set net profit margin before taxes. White Oak Advisors Principal James D. Robison said his firm looks for a margin of 22%-27%; PSA Fiduciary Consulting Group Practice Leader Jania Stout said her company looks for 15%. And their divergent views went even deeper: Robison advocated always having a positive margin, while Stout says her company is willing to lose money on some clients if that is a way to help build the firm’s infrastucture.
CUNA Mutual Retirement Solutions Practice Management Consultant Randy S. Fuss advocated a different approach: using hourly rate and billable hours as a guide. If 70% of the hours spent are revenue-producing, that spells profitability to his firm.
Another consideration is plan size — whether there is a minimum size a plan must be for an account to be profitable. For CUNA, it’s $5 million; they also employ tiered levels of services based on the size of a client plan. PSA also has a minimum plan size for clients they will serve. White Oak Advisors does not; instead, they consider whether a plan is willing to pay for services.
What if a plan is not profitable? Fuss says there are four options.
1. Fire the client.
2. Increase fees.
3. Take a good, hard look at how healthy the plan is; for instance, with regard to participation rates and deferral rates.
4. Do a provider search — are there others that do things differently whose practices you can adopt?
Fuss also advocated using profitability worksheets and being willing to outsource some functions as ways to measure profitability.
