Banks and credit unions commonly use profit margin to assess the performance of their investment services businesses. What are the consequences of this management approach for the health of the business?  By comparing the performance of firms with wider profit margins to those with thinner margins, a Kehrer Group study sponsored by Cetera Financial Institutions explored the impacts of managing to margin on the other key outcomes like revenue and profit penetration of the opportunity, revenue growth, and advisor revenue and asset productivity.

Profit margins are only weakly correlated with many of a firm’s objectives, including revenue penetration, revenue growth, and asset acquisition.  But profit margins are correlated with total profit contribution.

Arithmetically, it is logical to assume that wider profit margins increase total profit.  The data, however, indicate that this relationship holds only to a point; widening profit margins beyond the top quartile actually constrains total profit.  Focusing on controlling expenses and profit margin will ultimately constrain the number of dollars of profit that the investment unit is able to return to the institution.

That is because the major expense that is being controlled is the cost of advisors. Adding a new advisor reduces profit margin at first, because the new advisor typically has a higher transition payout at each level of production than established advisors, and there are other onboarding and recruiting expenses. The new advisor might actually be contributing profit, but less profit than after the advisor’s production has ramped up.

And Kehrer data indicate that advisor headcount is a key driver of revenue and profit growth.

The study—Margin Mismatch: Why Financial Institutions Should Stop Managing their Investment Services Business on Profit Margin— was sponsored by Cetera Financial Institutions, part of Cetera Investment Services.  Kehrer Group analyzed the experience of 196 banks and credit unions from 2019 to 2022, and determined how their profit margins and advisor headcount impacted their total revenue, revenue growth, total profit contribution, and advisor productivity.


About Cetera Financial Group®

Cetera Financial Group (Cetera) is the premier financial advisor Wealth Hub where financial advisors and institutions optimize their control and value creation. Breaking away from a commoditized and homogenous IBD model, Cetera offers financial professionals and institutions the latest solutions, support, and services to grow, scale, or transition with a merger, sale, investment, or succession plan. Cetera proudly serves independent financial advisors, tax professionals, licensed administrators, large enterprises, as well as institutions, such as banks and credit unions, providing an established and repeatable blueprint for scalable growth.

Home to more than 8,000 financial professionals and their teams, Cetera oversees approximately $341 billion in assets under administration and $121 billion in assets under management, as of June 30, 2023. In a recent advisor satisfaction survey of more than 21,000 reviews, Cetera’s Voice of Customer (VoC) program vigorously measures advisor experience and satisfaction 24/7. Currently, it’s ranked 4.8 out of 5 stars.

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