PHILADELPHIA -- Move over, benchmarks and multiples. There's a new valuation tool in town: key performance indicators.

While KPIs may not replace multiples of cash flow in a purchase agreement, they are becoming increasingly important as a way for owners of financial advisory firms to enhance the value of their business, according to Owen Dahl, president of Gladstone Analytics.

"Key performance indicators are helping advisors understand the relationship between how they are running the business on a daily basis and the firm's valuation," Dahl said at Gladstone Associates' annual advisor conference. "They are a great way to measure the quality of management."

Dahl breaks KPIs into three categories: practice management, client demographics and financial characteristics. Examples of KPIs include client additions and turnover; how long clients stay with the firm; age of clients; referral rates; assets under management per client by age; advisors' use of social media; and measuring marketing and advertising effectiveness by comparing expenditures to new client revenue.

Following through on tracking KPIs is critical, Dahl said.
"They should be part of a routine business plan and should be tracked daily," he explained. "The data is there and available."


Advisors also need to find the right KPI for their firm.

"I thought adding more people was a key performance indicator," said Al Zdenek, chief executive of Traust Sollus Wealth Management. "We tried it and I turned out to be wrong."

Andy Putterman, founder and chairman emeritus of Fortigent, the platform provider bought two years ago by LPL, said "99 out of 100" KPIs used by advisory firms are "not relevant. They are not matched up to business results the firms want to achieve."

Firms should limit key performance indicators they track to "no more than 10," said Putterman, who has begun a consulting practice. "They should be on target and they should be actionable."

In addition, KPIs should match the owners' personal objectives, Putterman cautioned. "Not everyone wants to maximize value," he said. "Some owners want to be able to sustain a thriving lifestyle practice."

Holding advisors -- and senior management -- accountable for the KPIs is a major challenge, Zdenek warned.

"Selecting key performance indicators is easier," he said, "but getting buy-in is hard. No one likes to be accountable."

Read more: