America’s Top (Real) Financial Advisors

“We looked at assets under management, revenues generated for advisors’ firms, and quality of practices.” Barron’s 2/23/2015

As Dana Carvey’s Church Lady used to say, “Isn’t that special?” Barron’s magazine came out with their Top 1,200 Financial Advisors list this week. I would question the definition of their term “Top”. Does this refer to the top line growth the firms who make this list garner, or a superior advisor experience for the investors who employ these individuals? I would wager on the former.

Getting on a list that gives enormous credence to assets under management (AUM) and revenues produced is usually not conducive to an ideal investor experience. Proprietary funds loaded with fees create enormous revenues. While this, in Barron’s view, helps determine a top advisor, investors are on the losing end of this deal. Revenues are also generated by increased transactions and active trading. These are widely known to damage an investor’s long-term returns and increase taxes substantially. The amount of revenue generated does not a top advisor make.

This elite list of 1,200 advisors relies heavily on the amount of assets under management, which is typically the result of marketing, not investing, acumen. While most major broker-dealers spend about $2 on investor education, they allocate a whopping $54 to marketing of their services. This marketing may get them on a list compiled by Barron’s, yet who is this list really for? Does this money benefit the individual or institutional investor? As the legendary investor David Swenson once said, “The mutual fund industry is not an investment management industry, it is a marketing industry.”

Finally the ambiguous “quality of practices” needs to be discussed. An advisor who merely finds suitable investments for his clients may have a crystal clean regulatory record, but he/she is not a fiduciary. I would think an advisor who is considered to be elite should, at the bare minimum, be looking out for their clients’ best interests (i.e., a fiduciary). While I am sure the advisors on the list are honest are decent people, the actions of many of the firms they work for have been called into question on numerous occasions by various regulators. Merrill Lynch, UBS, and Ameriprise have many advisors on this list. One could do a Google search of these firms and type in “regulatory infractions.” The results speak for themselves.

A real top advisors list needs to be created that would benefit the clients more than the firm. If I was ever put in charge of this assignment at Barron’s, here is what I would use as criteria for inclusion on this list (Hell will likely freeze over before this happens, but here goes nothing):

1. Clients are provided with full financial planning services – This would include advice on insurance needs, estate and college planning, social security strategies, and budgeting/debt management. The focus would be on things that an advisor can control and not on the randomness of market returns. There would be no fancy rugs or pictures on the wall where these meetings take place. The savings would be passed along to the client.

2. A focus on client education – Since all advisors on the list would be fiduciaries, the question of transparency would be a moot point. With no hidden fees or conflicts, the advisors would be able to fully engage clients and provide educational materials without having to worry about discussing vague or confusing compensation arrangements. Advisors would qualify for this list by educating, not selling. Advisors should also have an entertaining, plain-speak blog written in a language any non-finance major could comprehend.

3. A minimum of conflicts of interests – While all conflicts cannot be eliminated, they can be greatly reduced. To qualify for this list, advisors would not be able to collect sales commissions, referral fees, or use proprietary funds. This would greatly reduce the perverse incentives to put revenue generation above the best interests of the client. These actions would result in increased investor returns over time.

4. Evidence-based investing – The focus as Barry Ritholtz would say will be on “University Street.” Portfolios would be created by using data that, over long periods of time, have generated the best risk-adjusted returns for the investor. This would greatly reduce the risk of getting caught up in the latest investing fads and eliminate much of the emotional components that create a drag on returns. Companies like Dimensional Funds are poster children for this client-friendly process.

5. Inclusive culture – While many of the Barron’s advisors will not look at a client with a portfolio below seven figures, my new list would give advisors points for helping young people get on the right path. This could be done very easily with the inclusion of a robo-advisor in the practice. It is no longer cost-prohibitive to help out our future generation of investors. Down the road, this could reward the advisor by creating a farm team for the business. Top advisors should not just be available for the country club elite.

In effect, the real top advisor would be graded on their ability to sell wisdom, and not product. They would actually make the world a better place through conflict-free advice, and education. This may not get them on any top advisor list created by Barron’s, but they would provide the best experience for the end user. A real definition of top advisor would focus on doing the right thing for the client, not revenue generation for the firm or accumulating assets to get on snobby lists. Now that truly would be “special.”