I chaired a session at the Global WealthTech Summit on what happens when growth starts costing more than it earns.
I opened with Din Mustaffa, CFO at Evelyn Partners, with one question: what's the first number that tells you growth has stopped paying for itself?
He started with the tension every CFO in a growth business lives with.
"You always want to support the business becoming larger, generating more revenue, more value for the shareholders, the investors, the families. But you need to be quite cognizant of the cost base as well."
Then he didn't say AUM. He said jaws.
"The first thing I look at is incremental operating leverage, or jaws, which in simple terms is how much each additional pound of revenue actually translates into incremental profit."
He explained why headline growth misleads.
"It's easy in wealth management to celebrate growth in AUM, AUA, client numbers, top line, but those metrics don't necessarily tell you whether you're building a scalable business. You can grow AUM by 15%, but you might only grow revenue by 10%, because you're selling lower yield products, or you might be increasing costs by 20%."
The next level down is where it gets uncomfortable.
"Growth often hides inefficiency, especially when you're growing into new products, a new client segment, a new jurisdiction, a new system, or a new acquisition. Each might make sense individually, but collectively you create more reconciliations, more exceptions, more controls, more people managing the interfaces between those different parts of the business."
He backed it with a real decision. A review of every jurisdiction the firm operated in put a particular country in Europe on the list as a strong target market. He asked the country head for the payback period.
"He said five years. And when you're managing a limited amount of capital, and you've got other markets with a faster return, it's only logical that you roll back on the [particular country in Europe] plans."
Jason Chapman, UK Chief Commercial Officer at Moneyfarm and CEO of Willis Owen, then took the commercial view. Growth needs operations built around something you're still testing.
"Growth means you have to build operational processes and systems around what you're trialling, before you know it works."
His example was the push to move customers out of cash deposits and into digital products.
"It certainly produces high gross inflow. Do those customers stay? Do they buy other products? I think it's still difficult to determine. But the operational cost of bringing a large group of customers in through one product is challenging - you are always building, of course, on existing technologies."
My observation: neither measures growth by what comes in. Both measure it by what it costs to serve. The test I'd put to any wealth firm is whether you can see that cost by client type, product and entity, or only as one total.
Thank you, Din Mustaffa and Jason Chapman.