Returns on investment are one of the most critical aspects of business to master. Many advisors might need help with calculating it and knowing what that means for them. Without knowing how to interpret an ROI calculation you won’t know how to grow your marketing and practice (or if it’s even working as is). Here is an example from our business to help you better understand the importance of ROI.

Example:

*Non-dinner scenario

In the above example, we can see that from one seminar in which we invested $7500, we brought on $2,000,000 in assets. We charge a 1% fee in relation to those assets resulting in a net profit of $20,000. 

So to figure out ROI we simply divide the net income by the investment (20,000 / 7,500) resulting in a 2.66 (or 266.66%) ROI. This means that for every 1 dollar invested, we earned 2.66 dollars.

This does not include commission so we need to take into account the ‘lifetime value’ (LTV) of this assets under management client. We round to 10 years and multiply that by the net profit for total revenue of $200,000 from this client. 

We now recalculate the lifetime value ROI for this client to be 26.67. This a great ROI to achieve, if someone was offering to give you almost $27 in exchange for $1 we would all take that deal. 

Now, here comes the bad part. We can’t expect instant results. That example results in a great ROI after 10 years. Our instant ROI is still good (2.5 times our investment!) but we had to spend a decent amount to achieve it.

It takes some time to get a return on your investment and it takes money to make money. Which is okay! We just have to understand those facts and be able to recognize when it might be time to change strategies based on the numbers. This is also helpful for evaluating past decisions and advising future ones. It can also serve as an indicator of which project you should focus the most time and effort on.  

If you’d like to learn more about achieving a better ROI or have any questions, go here!