What can Michael Lewis’s “Moneyball” theory teach the retail wealth management industry?
The theory – coined in Lewis’s book, Moneyball: The Art of Winning an Unfair Game, and later adapted into a movie starring Brad Pitt – centers on a small baseball team, Oakland A, competing with its much larger rivals. While it could never match the depth of its rivals’ wallets, the team found a way of identifying underpriced players through statistical analysis. This identified metrics that were good predictors of performance and yet weren’t valued in the selection procedure.
This scenario does, PriceMetrix says in a new report, resemble the problem facing firms hiring in the wealth industry: top talent is very mobile and thus very expensive, and yet the payoff to the hiring firm remains uncertain.
A successful hire depends on the absence of compliance issues combined with a healthy margin, the report says, and so it focuses on production and the growth in production over time as a measure of success. It uses a model to predict future revenue as a function of advisor and book metrics from a benchmark time period. To do this, it used data from end-2006 to predict the twelvemonth total revenue for 2011 – data which the firm already had.
While current production is highly predictive of future production, as would be expected, fee revenue is more powerful as a predictor of future revenue than trailer or transactional revenue – so the greater the share of fee revenue in an advisor’s books, the higher the chance of revenue outperformance in the future.