It is little surprise that yield is one of the most talked about performance indicators in AUM reporting. Perhaps stating the obvious, but yield drives income which in turn plays an important part in determining client, segment and ultimately the firm’s profitability.

However, as with many elements of AUM reporting, this key metric is fully open to interpretation. Should the calculation be based on average AUM or spot AUM at the billing date? And should the income solely be fees or also include commissions and other income?

Let’s tackle the discussion on average yield versus spot yield first. For firms that are reporting AUM on a monthly or less frequent basis, average yield is probably going to be a pretty poor indicator of performance. Using the monthly example, averaging out three month ends is hardly representative of a quarterly average AUM balance and could be very different to the value at the billing date. Firms that move to weekly or daily reporting would have a stronger case to use an average, though it is still perhaps an inaccurate measure particularly if income is dominated by a single billing run.

A much more meaningful KPI for firms running a central periodic billing run is a spot yield calculation on the fee run date. It is certainly this value that should be used as the basis for the firm’s budgeting and forecasting and should clearly be the foundation for actual vs expected fee analysis. Reporting cycles should incorporate this requirement with a standard AUM reporting run being completed using exactly the same data as was sourced for the fee run.

Even if a firm has a clear strategy on average versus spot yield, there remain a number of challenges in making the metric meaningful. Take for example a client that holds £1m in a Discretionary portfolio and £100k in an Execution Only account. For perfectly valid reasons, that client could decide to take the fee from either account and the next client may take a completely different approach. To add to the complexity, the Investment Manager may choose to discount the fee on one or both portfolios. Without a fairly sophisticated process of allocating the income earned, the calculated yield will be skewed one way or another depending on each decision.

Whether to look at yield on a fee only basis or to incorporate commission is really at the firm’s discretion. If the reporting tool is sophisticated enough, it should be possible to look at all angles to further the analysis depending on the questions being asked. Total yield, fee yield and commission yield should form part of a suite of metrics.

Notwithstanding the overarching need for quality data, reporting functions need two things to maximise the insights from calculated yields. Firstly, a core enterprise wide client hierarchy on which yield can be calculated. If all parties agree the concept of the core client, then this naturally becomes the aggregation point for yield analytics. 

And secondly, firms should have the means to allocate the aggregated income across the client’s portfolios. Using the above Service Category example, if the fee was wholly booked to the Discretionary portfolio, then the reporting tool should have in-built logic to apportion the fee accordingly. Only then will a firm get a true understanding of segmental yield.

See original blog: https://www.linkedin.com/pulse/firms-get-yield-analysis-right-likely-have-unrivalled-paul-brann/