Expanding Profitability Reporting

In most wealth management firms, one person is responsible for profitability – you! There is one hot seat. There is one report detailing revenues, expenses, and hopefully a profit.

Some firms have created several hot seats, for example one for personal accounts, one for employee benefit accounts, and, say, one for estates. Now it is necessary to prepare a profit/loss report for each of these. These businesses have their own staffs, but they also share in use of certain service units such as operations, data processing, personnel, and senior management. It is necessary to apply/allocate these costs to each business.

Drawbacks are the following:

• Revenues not properly allocated to accounts in each business
• Costs not allocated to accounts
• Allocations not based on real service usage
• Officer cost not allocated to his/her accounts
• Cost methods are fixed and may not be challenged

Cost Modeling

Today, modern managers want to establish many hot seats, essentially making every account manager profit responsible for his/her accounts.

To support this reporting, you must use cost accounting to calculate profit/loss for each account.

Most general ledger systems provide a rudimentary tool to perform profit/loss calculations for departments. Most managers are unhappy with the results because the costing methods are oversimplified. Few systems have the ability to prepare profit/loss by account and officer.

With Profit Manager, you can model cost methods and make changes until you achieve “buy in” from the management team. We can help in this process. Because the process is online and interactive, you can quickly reapply costs, run p/l’s, and examine profit margins using different methods. This helps you complete the negotiation with managers and establish methods which are agreed to as fair.

Profit/Loss By Officer

In the following example, the bank has decided to prepare profit/loss by officer using only direct costs and a gross margin.

Profit/Loss by Account

Here is a profit/loss by account. Note that we show the p/l on actual fees and on would be standard fees:

Analyze Where You Make and Lose Money

Use Profit Manager to conduct special studies. Here we show, for small accounts, the range of profit loss. Our worst accounts are on the left, our best are on the right. The red bar represents the variance from standard fees. Even if we collected this variance (a full, standard fee in each account), we still could not make money on the first 70% of these accounts!

Here is a segment of profitable accounts, with values from $.5-2 million. But we lose money in lowest 30%, and much of this appears to be due to the variance from standard fees.

Benefits of Using Profit Manager:

• Establish profit consciousness among your people.
• Measure the profitability at any level in the organization and zero in on areas that need attention.
• You separate profitable accounts from unprofitable accounts
• You rank officers by profitability
• You measure the profitability of lines of business
• Tailor fee and commission increases that ensure each account’s costs are covered.
• Identify accounts that are costly to serve and focus on ways to either reduce their costs, or increase fees.
• Array accounts by profitability levels and find out why you have big losers and big winners.
• Optimize revenue increase and cost reduction programs. No longer will all customers be painted with the same broad brush. You can see the account-level, -income impact of your decisions.
• Confidently and aggressively compete on pricing being able to determine account level break-even points.

Use Profit Manager, Add Cost, P/L to All Your Business Reports

A number of clients are including cost and profit/loss results in all their business reporting. This is an exciting prospect. Are your people increasing fees in unprofitable accounts? Are substandard fee accounts unprofitable? Make every account manager a Profit Manager.