Shawshanked: Why Advisor Benchmarking Studies Fall Short

Everybody probably knows by now that I hate industry benchmarks. I have written about it a ta-tillion (that’s also a term we made up which means we’ve lost count) times. Not only because they make me have this same dumb conversation many times, every year, but also because they mean very little to individual advisory firms themselves. While benchmarks have a place in every industry, I am certain after nearly 15 years of consulting with advisors that they tell firms very little about their firm.

Here’s an example: 90% of my advisory clients exceed all the benchmarks. The 10% who don’t failed to do so because they are special firms with a unique, specialized service to clients and, as a result, the benchmarks don’t apply to them. So if nearly all my firms exceed the industry benchmarks, do we really need to pat them on the back or even to lower our standards?

My clients are successful not because of a benchmark but because, as a leadership team, we carefully work out where they want their firms to go, over prescribed time frames, and then create a detailed plan to get them there. While independent advisory businesses don’t really differ all that much, owner-advisors’ goals do. So the compilation of how “average advisory firms” have performed in the past tells us next to nothing about what each firm should do in their own futures. 

Of course, there are other problems with “benchmarking.”

For one thing, I don’t know of any benchmarking survey that actually confirms the data that advisors submit. Having been asked to review survey forms over the years, I know for a fact that the “answers” can vary widely from reality. Not to say that any advisors are intentionally misleading. But they’re busy folks, who don’t always take time to look up their answers (after all, if they just participate and fill it out they get the report for free!) and often, they are overly optimistic—or pessimistic. Of course, there’s the tendency to cast their firms in the best light. 

Doubly of course, the sampling sizes of most surveys is quiet small: a few hundred firms at best. Such small samples, when divided in segments by size and firm type, can make for significant skewing of the results, depending on which firms want the free report.

What’s more, the “financials” in a small, closely held business, such as an advisory firm, are all too subjective to be of much value. Profits can be suppressed for obvious reasons: but so can expenses, by under spending, which will hurt future growth. Even revenues—which you’d think would be cut and dried—can be overstated by taking on new clients that can’t be properly serviced, or “problem” clients that will eventually prove to be more costly than they’re worth.

Finally, there are the owners’ goals. Some owners want to grow their firms quickly into corporations, manage a bunch of people, make a “ta-tillion” dollars and sell out for big bucks to a bank. Others want a one- or two-advisor shop, to make good money, help their clients and create a lifestyle for themselves and all their employees. Most firms, which are often the ones we work with, fall somewhere in between, with a myriad of possible goals.

The only real measure of an advisory firm’s success is how much or how little resemblance it bears to what the owner(s) want today—and how well it is tracking a plan to become what the owner(s) wants in the future. I have yet to see an industry survey which tracks that. That’s why I tell advisors to never compare their firms to an “industry” benchmark: know your own benchmarks, based on your goals, and try to beat them.  And Shawshank yourself.

My Head after writing this blog:

“Ya know, benchmarking studies are great marketing pieces to hook advisors. Sucker! You’re writing about them and giving them press, again! Jeez…”