Why wealth management/fintechs should avoid vanity metrics and adopt sound business principles?

Have you heard of Fyre Festival? Several documentaries have been made about this music event fiasco. If you drill down the case, you will see it was all about vanity metrics. Using inflated and falsify metrics, the management garnered trust from the investors and secured funding. The scam has raised numerous questions about the style of working of the start-ups. One industry that has faced a significant challenge in the recent past is Fintech or the Wealth Management Industry that may or may not use technology for the advisory purpose.

So, what should be the right business approach? Why should one not use vanity metrics? Or, why is using vanity metrics not sustainable?

The danger of vanity metrics

When you measure the metrics, a business house or a manager tends to make decisions based on the outcome of the measurement. The problem with vanity metrics is that it doesn’t tell you real insights behind your business and provide you with information at a broad level. For example, if the market has done well for three months and you have generated a similar return for your investor, the vanity metrics only tell you the positive side of things which is your stock picks doing well. But what is more important to ask is, can you generate money higher than the market or constrain losses more than the market? Alternatively, a positive return during a bear market could also be a great way to analyze your business performance.

The main issues of using vanity metrics are detailed as under -

1. The spike doesn’t talk of the real cause, all it says is a broad analogy. For example, if there is an increase in the number of downloads of edtech app during Covid-19 it doesn’t mean that the trend is likely to continue for it. All, it means is that the spike is situational. For an entrepreneur, the focus should be to solve a pressing problem which shall enable automatic downloads in every weather.

2. It may not contribute to getting more paying customers or adding new customers in diff. geography/segment

Until and unless a businessman or a wealth manager knows the engagement level of the client and his rising inflows, it doesn’t even make sense to consider him as a client who is interested in your service and is willing to pay the fees.

So, what should be the solution?

A simple answer is — Use actionable metrics.

Unlike vanity metrics, actionable metrics should be synced with the objective of the organization or business idea. For wealth management industry, if your objective is to generate alpha, increase client base, or increase AUM by additional inflows (and not from capital gain), then the said figures should be your metrics. These figures should be then used in the boardroom for discussing the future strategy or pitching investors to raise funds in case of a start-up.

Let us take a very simple example of why vanity metrics doesn’t or may not work. Assume you are a wealth management company and all you do is promote your mobile app saying it is free. Even if you have 1 million downloads, you will not be able to say it is actionable until you have these many people registering the app and making the first transaction — irrespective of the fact it gives you revenue/profit or not. Similarly, the number of social media likes is just a vanity metric, whereas social media referral is actional.

In today’s progressive and aggressive business environment, governance standards cannot be neglected. It is critical to have sound governance should you wish to achieve a competitive edge and profitability over competitors. Governance is nothing but the framework by way of which a company governs its management and board while safeguarding the interest of the shareholders. They’re built on a foundation of transparency, accountability and trust. Time and again, the three terms have been used in the industry with a more pronounced way in the financial services sector given a lot is at stake in such sectors. For a wealth management industry, a firm should be fully committed to professionalism and integrity in doing business. Having a process/framework in place in the form of committee, review meetings or other internal checks ensures a firm doesn’t discriminate against or favor any client and fairness is maintained in quality and timing of service and allocation of investment opportunities. It also helps ensure that the firm allocates investment ideas equally and fairly amongst its clients in line with the client’s investment objective.

To conclude, we can say a sound business practice is the backbone for any business. What GST is to the economy, a sound governance practice is for the wealth management industry. In the case of former, the implementation is challenging, time-consuming but is helping reduce the informal economy that runs parallelly. Similarly, sound practices in an organization may result in not very big numbers on the balance sheet or P&L, but help ensures the stickiness of the clients. Talking of wealth management space, it may look crowded by many number of players but in reality, it is an evolving space given the lesser penetration levels of financial understanding in India. What is important for a successful player, in the sector, is not the balance sheet size but how all stakeholders look at the company and the measures that entrepreneurs set out as a practice within the organization to ensure fair, efficient, and transparent service delivery.

The above article is authored by Saumya Shah, Founder of tarrakki