What’s your CPH?

The financial services industry is one of the best places to work. We have the freedom to earn as much or as little as we want to. The freedom to work as many or as few hours as we wish. It also gives us the freedom to deal with the types of clients we want to work with. This can play a very important part in the profitability of your operation.

What’s your CPH?

When I first started in the business, I immediately took a look at how much it would cost me to run my practice and then determined the minimum amount I would need to generate per household to make my practice viable. The realization I quickly came to was that I would have to deal with certain minimum asset, revenue levels or I wouldn’t be able to stay in business for very long. As well, that led me to understand that the fewer the households, the lower the operating costs to run my practice. First thing I had to do was figure out my Cost Per Household (CPH).

Have you ever figured out what your CPH is?

You can’t decide which type of clients make sense for you to deal with before you figure out how much it costs you to run your operation, not counting your personal salary. What is a profitable household? Figure out how much it costs to run your operation. Divide that by the number of households you have and that is the bare minimum that each household has to generate for you to simply cover your costs – this is your CPH. The result may surprise you.

Let’s look at an example…Assume an advisor has 200 households and it cost $50,000 to run their shop. That means the breakeven or CPH on each household is $250 net. That means the household has to produce at least $400/year gross (depending on your payout rate) plus you need to make a living so add another $500 net or $800 gross for your salary. That would mean you need to generate $1,200 gross per household, which means at least $120,000 in assets per household at a 1% trail.

You can do your own calculations, using the CPH Calculator.

If you run a DSC or commission based business you could simply incorporate your projected commission income plus expected trails per household to determine how much is needed to break even.

This may make you look at your business in a different way. You may decide you need to work with a certain minimum revenue or asset base. You may look at reducing your office costs to reduce the cost per household. You may wish to reduce the amount of non profitable households to allow you to take on more profitable ones.

The key thing to remember here is to make sure you always keep top of mind that you are running a business and you have to look at cost per household in order to be able to continue to be in business for the long term. Best of luck in your practice.

Robert Abboud, CFP, PFP, is the co-founder of AdvisorPractice.com, which offers advisors practical solutions to help transition to a financial planning practice and offers a 12 week training program. He is also the author of ‘No Regrets, A Common Sense Guide to Achieving and Affording Your Life Goals’. He has been offering life goals financial plans for over 15 years through his firm Wealth Strategies. Robert is available to speak at conferences and educational days. You can contact him at rob@wealthstrategies.com.