Targets, Incentives, Advisors.

When I used to train new financial advisors, I let them know their performance (i.e., whether they’d be canned or not) was based on three metrics: how many new clients they signed up, how many new assets they brought in, and how much revenue they could generate. I also let them know about Goodhart’s Law, which says “when a measure becomes a target, it ceases to be a good measure.” The managerial class didn’t like me talking about Goodhart. They also didn’t like when I told advisors all I cared about was if they were smiling more than they were frowning.* But I figured if they were happy, they’d do well.

Financial advice is one of the few professions where clients are better off when they get what they need instead of what they want. It’s easy to give potential clients what they want. It’s hard to give potential clients what they need. For the most part, advisors desperate for new business will give potential clients what they want. They’ll cast aside their investment philosophy and chase performance. They’ll trade short-term pleasure for long-term pain. They’ll try to predict the future so that they sound smart. And both they and their new client will be a lot worse off because of it.

This is the part of the industry no one talks about.

New clients and new assets are easy for the managerial class to keep track of. They also lead to eventual revenue. “What gets measured gets done!” was the rallying cry of stockbrokers in the 1990s – make some cold calls, sell some stocks, make some commissions, repeat over and over again. Measure the number of calls the broker makes and you can estimate how much revenue they might bring in. More calls leads to more clients which leads to more commissions.

But the industry has evolved since then. And quite drastically. The business changed but the playbook didn’t. Most advisors are now paid based on a percentage of the assets they administer, not every time they buy and sell a stock. Most advisors now focus on a financial plan instead of pitching a product. And most advisors now look for clients for life and not for a one-time transaction. The metrics haven’t kept up, though.

Advisors should be measured by how many unsolicited referrals they receive. Unsolicited is the key word because it defeats Goodhart’s Law. If you start chasing referrals (asking for them or incentivizing them) they lose their meaning. But an unsolicited referral means you’re doing your job well. So well, in fact, that people are willing to suggest you to the people they care about – without worrying about embarrassment in the future. The metric is straightforward: be great at your job.

The old metrics still serve a purpose for brand new advisors, advisors who have no clients. You can’t earn unsolicited referrals if you don’t have any clients. But those old metrics are a starting point, not a permanent scoreboard.

If you’re a great advisor who’s tired of being measured like it’s 1993, give us a shout. HWM is growing. And we want to grow because we’re great at what we do. Not because we made enough calls or attended enough networking events or had the best booth with the best prizes at a roadshow. We want a team of people who smile more than they frown.

*With thanks to Apple co-founder Steve Wozniak