As a financial advisor, you probably spend a great deal of your time studying businesses to determine how successful they are. In other words, whether they're worth your clients' money. But don't forget to keep an eye on the success of your own firm. Measure and evaluate it as you would any business. Track it over time. Know what's working and what needs adjusting. That's the point of measuring success.

When it comes to business management, there are various ways to measure success that can help ensure the business is on the right track. Take a look at some of the best metrics for measuring a financial advisory practice and some tips for interpreting the numbers.

Assets Under Management

Assets under management (AUM) is a long-time favorite metric for the financial industry since it’s directly tied to the firm’s overall revenue. Business owners look at the trend in AUM over time to get an idea of whether a firm is growing. Prospective clients look at it too. A healthy AUM indicates a trusted and experienced advisor.

This metric can also be used to set goals for the next month or next year. In addition, the revenue estimates derived from AUM will help when it comes time to create an annual budget.

The problem with traditional AUM metrics for a financial advisor is that the firm's rate of growth may well become a diminishing figure as the practice grows. A financial advisor may instead want to look at net new AUM (that is, new assets under management) for the period, minus any lost accounts.

Business owners can use this metric to create a consistent growth target for each period rather than having to adjust it over time. It also provides a clearer real-time view of asset growth.

Average Revenue Per Client

Assets under management can’t be relied upon as a single metric for measuring the success of a financial advisory practice because it measures only top-line revenue.

For example, a practice could show increasing AUM over time even if rapidly escalating costs are reducing profitability. Some practices may discover a number of unprofitable clients. These may be worth letting go rather than continuing to provide them with services at a loss to the business.

Average revenue per client (ARPC), or average revenue per user as it is called in many businesses, is a great metric for measuring and improving profit margins over time. In some cases, a low ARPC figure indicates that the financial advisor is targeting too small a base of clientele.

If so, the advisor might increase ARPC by offering additional products and services. Alternately, the firm could target higher net worth clients in order to improve profit margins by reducing marketing and retention costs.

Net Profit Margin

Average revenue per client offers real insight into gross profit margins before fixed costs. The problem is that a financial advisory practice can still be unprofitable on a net level.

For example, high fixed costs, such as offices in an expensive location, can make profitability difficult on a net basis even though the firm looks highly profitable when looking at gross margins and ARPC metrics.

Net profit margin can be calculated by dividing net income by total sales and multiplying the result by 100. That's a familiar equation for any financial advisor.

In general, financial advisory practices should try to optimize for higher net profit margins, but it’s important to recognize that some capital expenditures may be necessary for long-term growth. Technological solutions particularly tend to pay off well, providing a competitive advantage in return for a high initial cost.

The Bottom Line

Financial advisors can achieve greater success by measuring their operational and financial progress using a number of key metrics. While advisors may be used to analyzing public companies, there are some metrics that they may want to use to measure the success of their own firm.

Advisors should be sure that they are employing the right metrics and consistently tracking them over time.

In addition to these metrics, a financial advisor may also want to consider looking at non-financial metrics like customer touches in order to optimize the firm's reputation and other intangible assets over time. These improvements will eventually lead to more tangible benefits like reduced client churn, lower marketing costs, and improved profitability.