Where to find a top advisor?!

Top advisor - magnifying glassSo…if you’re looking for the best financial advisor there is do you simply run a quick search on Google? Would it look something like ” best financial advisor in Denver” or “best financial advisor in Orange County”?  Would you rely on a list that ranks the best financial advisors?

In nearly every aspect of our lives we rank products or services and take pride if we are associated with or use that brand.  How often have you heard that a product has a “Gold Star Rating” or is recommended by ‘Consumer Reports’?  It should be no surprise that the same applies when it comes to the Financial Services industry.  Investors want to work with the best and often rely on rankings issued by various publications and websites for this information.

The key difference is that there are many more variables that need to be taken into consideration when looking at the financial industry and ranking firms or individuals.  In this article we will take a look at a list that is published annually and is highly respected – ‘Barron’s Top 1,000 Advisors List’.  Through our discussion it will become clear why ranking financial professionals is not as easy as ranking cars or laundry detergent and the results need to be looked at closely.

Barron’s is a weekly publication, owned by Dow Jones, its primary focus is reporting on the financial markets and global economies.  For decades it has been viewed as a leader in financial journalism and respected throughout the industry.  Professionals consider it an honor to be included in the list as it claims to highlight the best in the industry.

The list itself is very broad and includes financial professionals with many different titles and business models such as: Registered Reps, Stockbrokers, Registered Investment Advisors and Financial Planners to name just a few.  If an investor is considering hiring a financial professional it is vital that they understand these different titles and what makes each one unique.  One of the most popular articles ever written on this topic was published last year.  It is a must read for anyone that wants to understand how financial professionals are incentivized and compensated (What costume is Your Financial Advisor Wearing?).

As with any research the final results are only as accurate as the data that is collected.  Barron’s states that the information they use to create the list comes directly from the advisors that are featured in the list itself.  The advisors are provided with a questionnaire from Barron’s that has over 100 questions regarding their business.  The majority of the questions cover the number of clients the professional is working with, assets under management and the revenue that is generated.  There are very few questions covering key areas such as compliance, certifications, violations, ethics, client retention, client service and performance.  It is also not shared with how they find the advisors that this questionnaire is mailed to.

Let’s dig a little deeper and look at some key areas that this list and the financial services industry don’t typically want to discuss…

More Revenue = Higher Ranking?  Really?

One of the most glaring flaws we see with this list is that it assumes that advisors that are managing the largest amount of assets and producing a high level of revenue are among the ‘Best Advisors in America’.  This is like saying that if you have two similar products the highest priced one will always be the superior product.  This is flat out ludicrous…. wouldn’t it make more sense to look at what the advisor makes for the client rather than off the client?  Fees and expenses have a profound impact on a portfolio and can add years to any individual meeting their financial goals.

For example let’s assume that two different advisors are both managing portfolios worth $500,000 and one charges under one percent (.90%) while the other charges 2.5%.  On a yearly basis the second portfolio would need to return at least $8000 just to break even with the first portfolio.  Where does this additional $8,000 in fees go?  Those funds go directly to the either the advisor or his company.  How does this possibly make sense!?  Separating advisors by the fees they charge is a valid point to take into consideration but ranking them by this is certainly not.  Perhaps a more applicable factor would be to look at how advisors actually take care of their clients and their performance rather than by how much they are charging them?

Track Record:

Barron’s states: “Investment returns are not a component of rankings because an advisors returns are dictated largely by the risk tolerance of the clients”.  While we certainly can’t argue with this statement investors certainly need to understand what the advisor is going to do with their funds into.  It is important to note that if in advisor is included on this ‘prestigious list’ it does not in any way ensure that they will deliver competitive or superior performance results.  The one financial factor that can be taken from inclusion on the list is that the producers are generating a significant amount of fees based on the amount of assets that they manage.  Perhaps there should be a disclosure with this list similar to what investors have become familiar with over the years – “Inclusion on this list does not in any way guarantee future performance results.”

Advisor Background and Experience:

There is certainly much more that goes into selecting an advisor than just the number of clients they work with and their assets under management.  Some key areas that every investor should consider are: experience, education, registrations, fiduciary status and how they are compensated.  With regulations and compliance a focus in the investment industry there is an abundance of information readily available.  Background checks are available online to see if a professional has any violations or issues in the industry.  FINRA and the SEC both have websites that provide information that any individual would need to crosscheck an advisor.  As with any important decision individuals need to perform their due diligence.

Business Model and Culture:

As we mentioned before Barron’s list includes individuals with many different titles and business models.  In the financial industry there is often a conflict of interest and this always needs to be taken into consideration when looking at any advisor.  Do they only sell proprietary products? How are they incentivized? Who does the advisor truly work for?   While the industry conveniently  avoids discussing these topics they need to be examined more closely…

  • Proprietary Products – Many companies will only allow their advisors to select investment products from a limited list or only the investment vehicles offered by the company itself.  If an advisor can only sell the company’s products are they really an advisor or more of a glorified salesman?  In this day and age with so many investment options available why work with a professional that is restricted in their investment selection?  For example, if your account is custodied at Fidelity would your Fidelity Advisor only recommend Fidelity funds?
  • Compensation… How are they incentivized?  There are countless models on how advisors are paid.  It is critical that an individual knows what platform their advisor operates within.  Years ago many advisors were paid strictly off the commissions they generated by buying and selling within a portfolio.  With the growth of the online/discount brokers this is certainly not as prevalent but it still exists.  If your account is frequently traded is that part of the overall strategy or is it how your advisor is buttering his bread?  A more common compensation model has companies paying their advisors a higher payout to use certain products or services.  These options are often their own (proprietary) or with a company that they have a selling relationship with.  A more recent trend in the industry is advisors that charge a flat rate for the assets under management; they do not participate in any additional fees or commissions.  Investors should know how their advisor is paid and make sure that there is absolutely no conflict of interest.
  • Who does your advisor work for?  Ideally every financial professional should answer this question with the obvious answer…. their client.  Take a moment to really grasp this concept and how it can impact you and your portfolio.  If you work with an advisor associated with a large national or regional bank do they encourage you to use the banks services or present products and services offered through the bank? Can your advisor have an open and honest conversation with you regarding why they use certain products and services over others?  A term that has become much more prevalent in the Financial Services industry over the last decade is Fiduciary Responsibility.

 Fiduciary Responsibility = (from Investopedia) A person legally appointed and authorized to hold and manage assets for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.

  • Can your advisor state that they have a Fiduciary Responsibility and that is what drives their business model?  As we mentioned before there are numerous professional titles included in this survey.  The only one that is driven by a Fiduciary Responsibility is the Registered Investment Advisor.  Many of the other ones will claim that they focus on the client but are they legally bound to it?   A great example of this is years ago with Charles Schwab & Company, they claimed to have conflict free advice however you will not hear that verbiage in any of their offices these days. They now offer proprietary products and incentivize their employees to position them within clients portfolios.   There should be nothing mysterious regarding how your advisor is compensated and motivated.

In closing….

The financial services industry is much like any other industry, in that there areTop advisor - group picture numerous lists ranking the various products and services available to consumers.  It is important to keep in mind that just because a reputable publication like Barron’s creates a list of the “Top 1,000 Financial Advisors” it doesn’t necessarily mean that it is the ‘be all and end all’ solution!  Take the time to understand how the rankings are calculated to see if the results are applicable to you and your situation before making any decision.

As always, if you have any questions or comments please do not hesitate to contact us at your convenience.

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