Originally published in the March issue of American Funeral Director
The funeral service profession is well positioned to capitalize on this line of business for two reasons: an aging baby boomer generation and the appeal of preneed services to parents who want to take the financial burden off their children. But with increased threats from new and existing competitors and consumers looking at alternatives to traditional funerals, focusing on your preneed trust business could be just the tonic to boost top-line growth and profit margins.
While operators understand how preneed trusts work, many are unaware how a few key factors determine if future services are delivered at a profit or loss. While some factors are out of your control (stock and bond market performance), others are not (investment fees). Here are three key considerations to help you monitor your preneed trust program and improve the financial performance of your business:
1. Review Trust Portfolio Performance
The investment performance and fee structure of your trust portfolio are key drivers in the profitability of your preneed program. Operators should only work with respected, top-performing money managers who offer competitive fee structures, which will maximize investment returns and minimize administrative costs. Remember to keep in mind that mutual fund management and administrative fees will directly reduce your total return.
Your portfolio should be benchmarked to the appropriate index – for example, the S&P 500 for equities or the Bloomberg Barclays U.S. Aggregate Bond index for fixed income securities – for comparative purposes so you can evaluate investment performance and quantify the value your manager brings to the trust. If investments decline or do not keep pace with funeral service operating costs, the value of the trust may not cover the expense of delivering services and merchandise in the future.
2. Analyze Retainage
Retainage reduces the deposit from a preneed contract and puts pressure on operators to achieve the goal of having a trust balance that equals or exceeds the value of inflation-adjusted service prices in the future. The retainage you are allowed to keep based on your state regulations is mostly set aside for working capital purposes to pay for the operating costs of running your business. If the retainage is too high, however, the balance of the funds deposited into the account may not catch up with future costs, which means you’ll be providing services at a discount.
Operators should examine past retainage amounts and final contract costs to see if they are deducting the optimal amount. It will also serve as a helpful benchmark for future retainage deductions. This is a question of revenue now or revenue later, not eliminating the excess retainage.
3. Revisit Contract Length
All contracts are unique, given that the age and state of health vary widely for each individual. The age of contract holders gives you insight into when they are expected to go at need. Longer contract lengths increase the likelihood that the value of the trust will equal or exceed the current price of services. Operators should review contract value and length to maximize pricing and profits. This exercise is also extremely helpful in forecasting your revenue per call.
Positioning for the Future
Preneed contracts represent between 20 and 40 percent of a funeral operator’s revenue and should be a key profit center for your business. Understanding the important drivers of financial performance for your trust operations will help you mitigate unnecessary risk, improve profits and position your company for future growth. •