What is Financial Undressing? Here's How to Bare It All

Financial undressing: Key values

While you’re collecting these values for your own business, don’t just jot down numbers from memory.

Reference all your numbers from their source, and dig into your numbers from last year or last quarter.

Open your QuickBooks and pull up your actual billing report and client details to get started.

Gross revenue

The first value that you’ll need is your gross revenue. I define gross revenue as all the money debited from client accounts or your gross commissions generated.

If you received one percent, but on top of that was a half-point fee going to some other third party, that’s a 1.5% decline. Reference the number that came out of the client accounts before any haircuts – basically, what’s your AUM?

We’ll use your gross revenue to help calculate other values, like earnings before owner’s compensation – your gross income must be honest and accurate.

EBOC

We start with your gross revenue because we’ll use that value to calculate your earnings before owners' compensation (EBOC).

Your EBOC is the total amount you were paid, plus retirement-account contributions.

Retirement-account contributions are tacked on to this value because that’s your money, going into your accounts, delivering some taxed-advantaged savings.

The best place to look for your EBOC is on your tax returns. Once you find your value, you can’t go and add it back in if, for example, you wrote off your car. That doesn’t count towards your EBOC.

You may have done some solid tax planning – which is fantastic! But you must have a number you can validate. We’re drawing the line at the value on your tax returns plus retirement account contributions.

Tax return

Next, pull your income amount directly from your tax return. This value is honest because no one exaggerates their income to the IRS.

There’s no need to be embarrassed by your income. This number is what it is, and as we’re all striving toward perfection, you can use this value as a springboard for more aspirational goals.

Number of households

Let’s look at the number of households you’re serving and figure out how many times a year you’re meeting with your clients.

You may be tempted to go through your entire list and count how many times you’ve seen every client – don’t do that; it’s playing office.

Instead, let’s look at your service model for your ideal client. If you brought in your ideal client today, how many times a year would you want to see them?

If you’re still unsure how many meetings you have, pull out your calendar from last year. Count all your client meetings and then divide that by the number of clients you serve to get your meeting number.

Net income

Advisors typically get stuck with specific net-income dollar amounts and need help to break through to the next level. Examples of these ranges would be $100,000, $500,000, $1 million, and $5 million.

Tracking your net income over time will help us evaluate your long-term growth.

By doing so, we’ll see if you’ve plateaued in an income range that, for whatever reason, you're struggling to break through.

Maybe you’re stuck at $5 million because you’re trying to see 800 clients – no wonder you don’t have time for anything.

Maybe you’re stuck at $100,000 because you only brought on four clients last year. You need to look at all of these data points collectively to see the big picture in your firm.

Fee schedule

Over the years, I’ve seen advisors adamant about charging a 1% fee for their services. With $10 million under management, one should be bringing in $100,000 in revenue. But they weren’t; it was closer to $60,000.

That’s a fee of 0.6%, a far cry from what the advisor claimed. We need to be honest about how much we charge for our services, or you’ll never see the growth you want.

AUM

On top of your gross income, billing rate and fee schedule, look at your AUM to make sure all of these values jive.

It’s easy to get caught up in the little lies we tell ourselves. At one point or another, we’re all going to buy into our own BS, and I’m just as guilty. By considering all these values together, you’ll be able to build a more accurate picture of the effectiveness of your firm.

How to financially undress

You can’t do financial undressing by yourself. We tell ourselves too many stories and justify too many of our own decisions. We’ll spin the numbers, make adjustments and excuses. You just can’t have an honest evaluation without a third party to hold you accountable.

And for this reason, you can’t do it with a spouse or a business partner – it just won’t work with someone with whom you have a relationship.

You must have a group of five to 10 people with a growth mindset who aren’t afraid to call out your BS when they see it. Call out theirs too. Successful financial undressings are a two-way street; you need a solid group to make it work.

Find people willing to critically assess those numbers and ask thoughtful questions.

My practice has grown tremendously through financial undressing, but few other advisors are willing to be this transparent. As a result, these advisors will struggle to see any substantial growth because successful people do what unsuccessful people are unwilling to do. If that means bearing it all in a mastermind, I’m all for it.

Action Item

Open a spreadsheet and record your numbers for each value listed here. It doesn’t have to be fancy; just create a handful of columns and track your growth.

Matthew Jarvis, CFP®, ChFC, is the co-founder of The Perfect RIA, one of the industry's most recognized advisor-training platforms. Just 10 years prior, Jarvis was buried in debt with a badly struggling practice and a morning routine of trying to figure out how to quit the profession without looking like a failure. Through several turns of fate, Jarvis clawed from near failure to the top of the profession. Today, alongside running his incredibly profitable and successful practice, Jarvis guides other advisors on duplicating his success in their practice.

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